Essays in dynamic optimal taxation: working experience, unemployment scarring and poverty

This thesis investigates the design of optimal tax systems in dynamic environments. The first essay characterizes the optimal tax system where wages depend on stochastic shocks and work experience. In addition to redistributive and efficiency motives, the taxation of inexperienced workers depends on a second-best requirement that encourages work experience, a social insurance motive and incentive effects. Calibrations using U.S. data yield higher expected optimal marginal income tax rates for experienced workers for most of the inexperienced workers. They confirm that the average marginal income tax rate increases (decreases) with age when shocks and work experience are substitutes (complements). Finally, more variability in experienced workers' earnings prospects leads to increasing tax rates since income taxation acts as a social insurance mechanism. In the second essay, the properties of an optimal tax system are investigated in a dynamic private information economy where labor market frictions create unemployment that destroys workers' human capital. A two-skill type model is considered where wages and employment are endogenous. I find that the optimal tax system distorts the first-period wages of all workers below their efficient levels which leads to more employment. The standard no-distortion-at-the-top result no longer holds due to the combination of private information and the destruction of human capital. I show this result analytically under the Maximin social welfare function and confirm it numerically for a general social welfare function. I also investigate the use of a training program and job creation subsidies. The final essay analyzes the optimal linear tax system when there is a population of individuals whose perceptions of savings are linked to their disposable income and their family background through family cultural transmission. Aside from the standard equity/efficiency trade-off, taxes account for the endogeneity of perceptions through two channels. First, taxing labor decreases income, which decreases the perception of savings through time. Second, taxation on savings corrects for the misperceptions of workers and thus savings and labor decisions. Numerical simulations confirm that behavioral issues push labor income taxes upward to finance saving subsidies. Government transfers to individuals are also decreased to finance those same subsidies.

Performance Information and Innovation in the Canadian Government (Working Paper 43)

The presentation made at the conference addressed the issue of linkages between performance information and innovation within the Canadian federal government1. This is a three‐part paper prepared as background to that presentation. • Part I provides an overview of three main sources of performance information - results-based systems, program evaluation, and centrally driven review exercises – and reviews the Canadian experience with them. • Part II identifies and discusses a number of innovation issues that are common to the literature reviewed for this paper. • Part III examines actual and potential linkages between innovation and performance information. This section suggests that innovation in the Canadian federal government tends to cluster into two groups: smaller initiatives driven by staff or middle management; and much larger projects involving major programs, whole departments or whole-of-government. Readily available data on smaller innovation projects is skimpy but suggests that performance information does not play a major role in stimulating these initiatives. In contrast, two of the examples of large-scale innovation show that performance information plays a critical role at all stages. The paper concludes by supporting the contention of others writing on this topic: that more research is needed on innovation, particularly on its link to performance information. In that context, other conclusions drawn in this paper are tentative but suggest that the quality of performance information is as important for innovation as it is for performance management. However, innovation is likely to require its own particular performance information that may not be generated on a routine basis for purposes of performance management, particularly in the early stages of innovation. And, while the availability of performance information can be an important success factor in innovation, it does not stand alone. The commonality of a number of other factors identified in the literature surveyed for this paper strongly suggests that equal if not greater priority needs to be given to attenuating factors that inhibit innovation and to nurturing incentives.