Mankiw’s review article on Optimal Taxation Theory is really great. This is exactly why EA needs more economists.
I find this intriguing:
it is directly concerned with what type of tax system maximises utility
Does “utility” as used by economists diverge in important ways from “utilitarianism” as used by moral philosophers? If the social planner optimizes for minimal negative utility, I assume that could change the optimal tax structure.
In the Mankiw article, the first justification of Capital Income Ought To Be Untaxed seems clear:
because capital equipment is an intermediate input to the production of future output… it should not be taxed
However, I’m not sure if capital income and capital equipment are interchangeable concepts. Perhaps they are.The second justification seems a bit murkier:
Second, because a capital tax is effectively a tax on future consumption but not on current consumption, it violates the Atkinson and Stiglitz (1976) prescription for uniform taxation. In fact, a capital tax imposes an ever-increasing tax on consumption further in the future, so its violation of the principle of uniform commodity taxation is extreme.
I’m not clear how that logic would be different if applied to labour. Probably I need to read more about this to fully understand it. I assume the idea is I can reinvest capital income into more capital, but I can’t reinvest labour income into more labour. The article mentions “human capital”, so maybe I can reinvest my labour income into “human capital” such as education.Finally, the third justification:
This distortion is so large as to make any capital income taxation suboptimal compared with labor income taxation, even from the perspective of an individual with no savings.
Has the premise:
In the Ramsey model, at least some households are modeled as having an infinite planning horizon (for example, they may be dynasties whose generations are altruistically connected as in Barro, 1974).
I’m not sure how realistic it is for households to have an infinite planning horizon. Moreover, it seems undesirable and dangerous to optimize for what could potentially be a totalitarian dynasty. Perhaps I’m misunderstanding the argument here.
The Mankiw article made me curious:
How easy is it to distinguish labour income from capital income? For example, a salaried plumber receives labour income, but a plumber who is paid as an independent contractor presumably receives capital income.
Is a laptop purchased by a business considered capital, but the same device purchased by a family considered consumption?
If tax havens’ low tax is beneficial, could the secrecy they provide to illicit financial flows be considered a harmful externality?
The article raises democratic legitimacy as an important constraint:
When Margaret Thatcher, during her time as the Prime Minister of the United Kingdom, successfully pushed through a lump-sum tax levied at the local level (a “community charge”) beginning in 1989, the tax was deeply unpopular.
Optimal Taxation Theory contains some really interesting ideas. Tax policy, in general, seems like a neglected area of EA.