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.

Three Essays on Economic Development in the Natural Resources Sector

This thesis examines two ongoing development projects that received financial support from international development organizations, and an alternative mining tax proposed by the academia. Chapter 2 explores the impact of commoditization of coffee on its export price in Ethiopia. The first part of the chapter traces how the Ethiopian’s current coffee trade system and commoditization come to be. Using regression analysis, the second part tests and confirms the hypothesis that commoditization has led to a reduction in coffee export price. Chapter 3 conducts a cost-benefit analysis on a controversial, liquefied natural gas export project in Peru that sought to export one-third of the country’s proven natural gas reserves. While the country can receive royalty and corporate income tax in the short and medium term, these benefits are dwarfed by the future costs of paying for alternative energy after gas depletion. The conclusion is robust for a variety of future energy-price and energy-demand scenarios. Chapter 4 quantifies through simulation the economic distortions of two common mining taxes, the royalty and ad-valorem tax, vis-à-vis the resource rent tax. The latter is put forward as a better mining tax instrument on account of its non-distortionary nature. The rent tax, however, necessitates additional administrative burdens and induces tax-avoidance behavior, both leading to a net loss of tax revenue. By quantifying the distortions of royalty and the ad-valorem tax, one can establish the maximum loss that can be incurred by the rent tax. Simulation results indicate that the distortion of the ad-valorem tax is quite modest. If implemented, the rent tax is likely to result in a greater loss. While the subject matters may appear diverse, they are united by one theme. These initiatives were endorsed and supported by authorities and development agencies in the aim of furthering economic development and efficiency, but they are unlikely to fulfill the goal. Lessons for international development can be learnt from successful stories as well as from unsuccessful ones.

Do Multiculturalism Policies Erode the Welfare State (Working Paper 33)

The past 30 years have witnessed a dramatic change in the way Western democracies deal with ethnic minorities. In the past, ethnic diversity was often seen as a threat to political stability, and minorities were subject to a range of policies intended to assimilate or marginalize them. Today, many Western democracies have adopted a more accommodating approach. This is reflected in the widespread adoption of multiculturalism policies for immigrant groups, the acceptance of territorial autonomy and language rights for national minorities, and the recognition of land claims and selfgovernment rights for indigenous peoples. We refer to these policies as “multiculturalism policies” or MCPs. The adoption of MCPs has been controversial, for two reasons. The first is a philosophical critique, which argues that MCPs are inherently inconsistent with basic liberal-democratic principles. Since the mid-1990s, however, this philosophical debate has been supplemented by a second argument: namely, that MCPs make it more difficult to sustain a robust Welfare State (hereafter WS). Critics worry that such policies erode the interpersonal trust, social solidarity and political coalitions that sustain a strongly redistributive WS. This paper reviews the reasons why critics believe that MCPs weaken political support for redistribution, and then examines empirically whether the adoption of MCPs has, in fact, been associated with erosion of the WS. This examination involves two steps: we develop a taxonomy of MCPs and classify Western democracies as “strong”, “modest” or “weak” in their level of MCPs. We then examine whether the strength of MCPs is associated with the erosion of the WS during the 1980s and 1990s. The evolution of the WS is measured through change in four indicators: social spending as a percentage of GDP; the redistributive impact of taxes and transfers; levels of child poverty; and the level of income inequality. We find no evidence of a consistent relationship between the adoption of MCPs and the erosion of the WS. Our analysis has limits, and we hope it stimulates further research. Nevertheless, the preliminary evidence presented here is clear: the case advanced by critics of MCPs is not supported. The growing ethnic diversity of Western societies has generated pressures for the construction of new and more inclusive forms of citizenship and national identity. The evidence in this paper suggests that debates over the appropriateness of multiculturalism policies as one response to this diversity should not be pre-empted by unsupported fears about their impact on the WS.