T he fair distribution of the tax burden has long been a central issue in policyhe fair distribution of the tax burden has long been a central issue in policymaking. A large academic literature has developed models of optimal tax making. A large academic literature has developed models of optimal tax theory to cast light on the problem of optimal tax progressivity. In this theory to cast light on the problem of optimal tax progressivity. In this paper, we explore the path from basic research results in optimal tax theory to paper, we explore the path from basic research results in optimal tax theory to formulating policy recommendations. formulating policy recommendations. Models in optimal tax theory typically posit that the tax system should maximize a Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, taking into account social welfare function subject to a government budget constraint, taking into account that individuals respond to taxes and transfers. Social welfare is larger when resources that individuals respond to taxes and transfers. Social welfare is larger when resources are more equally distributed, but redistributive taxes and transfers can negatively are more equally distributed, but redistributive taxes and transfers can negatively affect incentives to work, save, and earn income in the fi rst place. This creates the clasaffect incentives to work, save, and earn income in the fi rst place. This creates the classical trade-off between equity and effi ciency which is at the core of the optimal income sical trade-off between equity and effi ciency which is at the core of the optimal income tax problem. In general, optimal tax analyses maximize social welfare as a function of tax problem. In general, optimal tax analyses maximize social welfare as a function of individual utilities-the sum of utilities in the utilitarian case. The marginal weight for individual utilities-the sum of utilities in the utilitarian case. The marginal weight for a given person in the social welfare function measures the value of an additional dollar a given person in the social welfare function measures the value of an additional dollar of consumption expressed in terms of public funds. Such welfare weights depend on of consumption expressed in terms of public funds. Such welfare weights depend on the level of redistribution and are decreasing with income whenever society values the level of redistribution and are decreasing with income whenever society values more equality of income. Therefore, optimal income tax theory is fi rst a normative more equality of income. Therefore, optimal income tax theory is fi rst a normative theory that shows how a social welfare objective combines with constraints arising from theory that shows how a social welfare objective combines with constraints arising from limits on resources and behavioral responses to taxation in order to derive specifi c limits on resources and behavioral responses to taxation in order to derive specifi c

This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous ran-dom tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. The long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic param-eters, the optimal tax rate on capitalized inheritance should be as high as 50%-60%–or even higher for top wealth holders–if the government has meritocratic preferences (i.e., puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, be-quest taxation remains desirable in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique de-terminant of lifetime resources. In contrast to Chamley-Judd, positive capital taxation is

www.ifs.org.uk/mirrleesreview

Contributions to Public Policy Bill Vickrey’s cast of mind was that of a theorist. His interests, however, lay in public policy. This combination of traits-- in addition to genius-- resulted in his producing a magnificent body of research in applied economic theory, but at the same time in his having only limited success in the public policy arena. The apparent failure of his crusading, whether for congestion pricing, cumulative averaging in income taxation, a larger deficit, or full employment, was a source of real disappointment to him. He should have realized, however, that those traits which lead to good applied theorizing-- abstracting from detail and focusing on only a few aspects of a policy issue-- are not conducive to balanced policy advice. He should also have taken heart in the thought of Keynes ’ proverbial academic scribbler. While Vickrey’s work has to date had only a modest impact on public policy, there is good reason to believe that in the fullness of time his ideas will percolate into public policy culture and have considerable influence, and that many of his policy proposals, appropriately modified to account for practical considerations, will be taken up. His seminal work on auction theory has already had a major impact on the allocation of drilling rights, timber rights and bandwidth; his work on marginal-cost pricing has been influential in the

I am grateful for support from the Cato Institute for this project. I am also grateful to John Sabelhaus for allowing me to use his family level extracts constructed from the Consumer Expenditure Survey and to Andrew Mitrusi for helpful discussions and advice. Executive Summary I use data from the Consumer Expenditure Survey (CES) to measure the lifetime incidence of a shift from the current income tax to a National Retail Sales Tax. I show that the distribution of the tax reform depends in important ways on the measure of household well being. If annual income is used to rank households, the tax reform looks very regressive. When lifetime income is used to rank households, the tax reform continues to look regressive though much less regressive than when the annual income approach is used. I also consider various ways to add progressivity to the new tax system. If a universal rebate tied to poverty thresholds is coupled with the national sales tax, the system looks nearly as progressive as the current income tax system when households are ranked by lifetime income. The universal rebate in effect exempts from the sales tax spending by individuals and families up to the poverty threshold. Using the poverty threshold to construct the rebate has the advantage

To understand the role of evidence in tax policy design, this paper organizes the empirical analysis of reform under five loosely related headings: (i) key margins of adjustment, (ii) measurement of effective tax rates, (iii) the importance of information and complexity, (iv) evidence on the size of responses, and (v) implications from theory for tax design. The context for the discussion is the recently published Mirrlees Review of tax reform. Although the Review focused on all aspects of tax reform, this paper highlights the taxation of earnings. It also comments on earnings taxation in the context of VAT base-broadening reforms and the taxation of capital (JEL: H2, H3). 1.

The economic crisis that erupted in 2008 has prompted many countries to rethink, and several already to reform, the taxation of financial institutions. The underlying analytical issues, however, have received almost no attention in the public finance literature. This article explores the possible purposes and broad design of distinctive tax measures for financial institutions, focusing especially on the potential role of corrective taxation, and its merits relative to traditional forms of regulation, in addressing the challenges posed by the potential failure of systemically important institutions. (JEL codes: G38, H21 and H23)

Working draft. Not for quotation. Comments invited.

The U.S. tax system has often been criticized for affecting the firm's incentive to incorporate by subjecting proprietors and stockholders to unequal tax burdens. This system has also been blamed for inducing misallocation of capital between the proprietary and corporate sectors through distortive

I appreciate the high honor of receiving the John R. Commons award, and take great pleasure in joining the list of very distinguished past winners. 1978 saw the publication of The Structure and Reform of Direct Taxation, the report of a committee headed by James Meade. 3 To consider the design of a tax system for the UK, the Meade Report, as it came to be called, analyzed the elements that should be considered when designing a tax system. Chapter 2 of the Meade Report, ‘The Characteristics of a Good Tax Structure’, is divided into six sections: Incentives and economic efficiency, Distributional effects, International aspects, Simplicity and costs of administration and compliance, Flexibility and stability, and Transitional problems. To consider direct taxation in the UK, the Meade Committee examined each of these issues separately and then combined the insights into a policy recommendation. It seems to me, as it seemed to Alfred Marshall, that this is an appropriate way to proceed.4 While the capacity of computers to find equilibrium in complex models has grown greatly since the Meade Report, the models available for analysis, like much of the underlying theory, are still quite limited in the ability to address the allocation issues that they incorporate and are still too far from reality to proceed in any other fashion than that followed by the Meade committee, by addressing multiple issues separately.