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Abstract:
This paper explores how EU countries can address various challenges (including the aging of the population) affecting their systems of old-age income support. It presents two scenarios illustrating the most important uncertainties surrounding the major developments that affect the pension systems of the EU. To diversify these risks, EU governments should act on several fronts. In addition to the formation of human capital (especially that of children), employment (especially that of older workers) should be boosted. This calls for social insurance reform with more emphasis on individual saving schemes. Pension schemes should be more explicit about how they share demographic and other risks. Countries that currently rely heavily on public pay-as-you-go (PAYG) schemes should stimulate private pensions by gradually reducing PAYG benefits collected by high-income earners, by issuing new financial instruments, and by conducting intergenerational risk sharing through the tax system.

Abstract:
The Netherlands has abolished the tax on actual personal capital income and has replaced it by a presumptive capital income tax, which is in fact a net wealth tax. This paper contrasts this wealth tax with a conventional realization-based capital gains tax, a retrospective capital gains tax with interest on the deferred tax, and a mark-to-market tax which taxes capital gains as they accrue. We conclude that the effective and neutral taxation of capital income can best be ensured through a combination of (a) a mark-to-market tax to capture the returns on easy-to-value financial products, and (b) a capital gains tax with interest to tax the returns on hard-to-value real estate and small businesses.

Capital income taxation, capital gains taxation, tax reform, wealth tax

Abstract:
The Dutch Parliament has passed legislation for a new income tax that abolishes the current tax on personal capital income and substitutes it by a presumptive capital income tax, which is in fact a net wealth tax. This paper contrasts this wealth tax with a conventional realization-based capital gains tax, a retrospective capital gains tax which attempts to charge interest on the deferred tax, and a capital accretion tax which taxes capital gains as they accrue. None of the approaches meets all criteria for a 'good' income tax, i.e., equity, efficiency, and administrative feasibility. We thus conclude that the effective and neutral taxation of capital income can best be ensured through a combination of (a) a capital accretion tax to capture the returns on easy-to-value financial products, (b) a capital gains tax with interest to tax the returns on hard-to- value real estate and small businesses, and (c) a broad presumptive capital income tax, i.e., a net wealth tax, to account for the utility of holding wealth. We favor uniform and moderate proportional tax rates in the context of a dual income tax under which capital income is taxed separately from labor income.

Capital income taxation, capital gains taxation, tax reform, wealth tax

Abstract:
In exploring the impact of tax policy on labor-market performance, the paper first investigates how tax reform impacts labor supply and equilibrium unemployment in representative agent models. The impact of tax policy on labor market performance depends importantly on various other labor-market institutions, such as minimum wage laws, wage bargaining, and unemployment benefits. In non-competitive labor markets, employment declines if a higher tax burden makes the outside option (i.e. unemployment) relatively more attractive. Marginal tax rates typically differ substantially across individuals. To explore the impact of specific tax policies, therefore, the paper relies on an applied general equilibrium model to investigate the consequences of tax reform with heterogeneous households. The model simulations reveal several trade-offs between various objectives, such as cutting unemployment, stimulating the participation of secondary workers into the labor force, raising the quality and quantity of labor supply, and establishing an equitable income distribution. The paper also analyses how efficiency considerations affect the optimal progressiveness of labor income taxes. Finally, the optimal progression of the labor income tax is investigated in the presence of search unemployment, heterogeneous households and distributional concerns.

Abstract:
Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.

optimal lifetime income taxation, optimal social insurance

Abstract:
This paper attempts to paint a coherent picture of the effects of ageing on a small, open, economy with large pension funds in different institutional settings. Quantitative scenarios are projected with an applied computable general equilibrium model with institutional details. We find that ageing leads to a tighter labor market, increasing costs for both pension funds and the government, and leaving the economy vulnerable to financial and further demographic shocks. We show that defined benefit pension arrangements can be destabilizing, but less so if an average-wage variable-indexation contract is chosen. Government can help by adopting a policy of tax smoothing, but the single most important determinant of the net burden of ageing is the eventual size of the increase in labor market participation of older workers. The intergenerational welfare effects of demographic shocks and changes in international interest rates are sizable and should be an integral part of the assessment of different policy instruments.

ageing, funded pensions, applied general equilibrium models, the Netherlands

Abstract:
We argue in favour of the shareholder model of the firm for three main reasons, First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle between the stakeholders about the ultimate goal of the company. In many cases, the vague Rhineland principles no longer offer much protection to workers. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs, which harms the position of job seekers, including new entrants to the labour market. Third, and most importantly, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. Diversification of this risk on the capital market is an efficient form of social insurance. Reducing the claims of workers on the surplus of the firm can be seen as the next step in the emancipation of workers. Workers derive their security not from the firm that employs them but from the value of their own human capital. In such a world, global trade in corporate control, global competition and creative destruction associated with these developments are more legitimate.

Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm's surplus, thereby protecting workers against firm-specific risks. Indeed, in Denmark, workers bear less firm-specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. This is why corporate governance legislation that gives moral legitimacy to the claim of insiders on the surplus of the firm is damaging.

The transition from the Rhineland model (in which management serves the interests of all stakeholders) towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights without benefiting from increased job creation and higher starting wages. Whereas the claims of older workers on the surplus of a firm may thus have some legitimacy, younger cohorts should be denied such moral claims. These problems require extreme political skill to solve. In particular, they may require some grandfathering provisions or temporary explicit transfers from younger to older generations.

corporate governance, employment protection, optimal risk sharing, wagesetting

Abstract:
We argue in favour of the shareholder model of the firm for three main reasons. First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle between the stakeholders about the ultimate goal of the company. In many cases, the vague Rhineland principles no longer offer much protection to workers. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs, which harms the position of job seekers, including new entrants to the labour market. Third, and most importantly, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. Diversification of this risk on the capital market is an efficient form of social insurance. Reducing the claims of workers on the surplus of the firm can be seen as the next step in the emancipation of workers. Workers derive their security not from the firm that employs them but from the value of their own human capital. In such a world, global trade in corporate control, global competition and creative destruction associated with these developments are more legitimate. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm's surplus, thereby protecting workers against firm-specific risks. Indeed, in Denmark, workers bear less firm-specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. This is why corporate governance legislation that gives moral legitimacy to the claim of insiders on the surplus of the firm is damaging. The transition from the Rhineland model (in which management serves the interests of all stakeholders) towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights without benefiting from increased job creation and higher starting wages. Whereas the claims of older workers on the surplus of a firm may thus have some legitimacy, younger cohorts should be denied such moral claims. These problems require extreme political skill to solve. In particular, they may require some grandfathering provisions or temporary explicit transfers from younger to older generations.

wagesetting, optimal risk sharing, employment protection, corporate governance

Abstract:
We argue in favour of the shareholder model of the firm for three main reasons. First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle about the ultimate goal of the company. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Diversification of firm-specific risk on capital markets is an efficient form of social insurance. Hence, firms should bear the full cost of specific investment, while workers should be paid only their outside option.

Empirical results for Denmark, Portugal and the United States show that Denmark is closest to the first-best outcome, while Portugal and the United States deviate in different ways. Coordination in wage bargaining and collective norms help reduce the claim of workers on the firm's surplus. Collective action, however, is a mixed blessing because politicians also face the temptation to please incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. The transition from the Rhineland towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights.

Corporate Governance, Employment Protection, Optimal Risk Sharing, Wage setting

Abstract:
We argue in favor of the shareholder model of the firm for three main reasons. First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle about the ultimate goal of the company. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Diversification of firm-specific risk on capital markets is an efficient form of social insurance. Hence, firms should bear the full cost of specific investment, while workers should be paid only their outside option. Empirical results for Denmark, Portugal and the United States show that Denmark is closest to the first-best outcome, while Portugal and the United States deviate in different ways. Coordination in wage bargaining and collective norms help reduce the claim of workers on the firm's surplus. Collective action, however, is a mixed blessing because politicians also face the temptation to please incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. The transition from the Rhineland towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights.

wagesetting, optimal risk sharing, employment protection, corporate governance

Abstract:
This paper employs an overlapping generations model to explore the impact of public abatement on private investment and the intergenerational distribution of welfare. Whereas public abatement benefits old generations in terms of non-environmental welfare, future generations gain most in terms of environmental welfare. The overall benefits tend to be smallest for generations born at the time of the unanticipated policy shock. Public debt policy, however, can be employed to ensure that welfare gains are distributed more equally across the various generations. Such a policy implies that natural capital crowds out man-made capital.

Abstract:
In the modern welfare state a substantial part of an individual's tax bill is transferred back to the same individual taxpayer in the form of social transfers. This provides a rationale for financing part of social insurance through mandatory savings accounts. We analyze the behavioral and welfare effects of compulsory savings accounts in an intertemporal model with uncertainty, endogenous involuntary unemployment and retirement decisions, credit constraints, and heterogeneous agents. We show that the introduction of (early) retirement and unemployment accounts generates a Pareto improvement by enabling the government to provide lifetime income insurance and liquidity insurance in a more efficient manner.

Abstract:
The combination of discretionary monetary policy, labour-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, country-specific debt targets must complement uniform debt ceilings in order to prevent decentralized fiscal authorities from employing debt policy strategically.

Discretionary monetary policy, wage rigidity, decentralized fiscal policy, monetary union, inflation targets, debt targets

Abstract:
The combination of discretionary monetary policy, labor-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, uniform debt ceilings must be complemented by country-specific debt targets in order to prevent decentralised fiscal authorities from employing debt policy strategically.

Discretionary Monetary Policy, Wage Rigidity, Decentralized Fiscal Policy, Monetary Union, Inflation Targets, Debt Targets

Abstract:
As regards labour-market reform and employment policies, the European Union currently touts the concept of 'flexicurity', aiming at simultaneously enhancing both flexibility and security in the labour market in view of the globalization of the economy and far-reaching demographic developments such as the ageing of the population. Each Member State is expected to map out its own distinct pathway towards more flexicurity and the European Commission has, for that matter, suggested a set of four idealtypical pathways. Therefore a need exists for ideas and examples on how to elaborate a flexicurity pathway, looking for inspiration rather than imitation. In the Netherlands, a government-appointed Committee on Labour Market Participation (the so-called Bakker Committee) has recently published proposals and recommendations for further reform of the Dutch labour market. This paper discusses the part of these proposals that involves a particular flexicurity pathway towards better transition security and higher labour-market mobility. This possible pathway, now being debated in the Netherlands, may also be of interest to other Member States.

flexicurity, transition security, labour market reform, employability, unemployment insurance

Abstract:
Indirect taxes are an important element in stabilization tax packages that aim at raising revenue in the short run. This paper evaluates, by using a general equilibrium model, alternative instruments of indirect taxation in middle-income developing countries. It uses data for Thailand as an illustration and examines the effects on revenue, efficiency, equity, and international competitiveness. The paper shows that the interaction between taxes and distortions caused by various policies can be important for revenue and efficiency. It also reveals significant backward shifting and a link between outward-looking supply-side tax policies and trade policies in industrial countries.

Abstract:
This chapter examines government policy alternatives for protecting the environment. We compare environmentally motivated taxes and various non-tax environmental policy instruments in terms of their efficiency and distributional impacts. Much of the analysis is performed in a second-best setting where the government relies on distortionary taxes to finance some of its budget. The chapter indicates that in this setting, general equilibrium considerations have first-order importance in the evaluation of environmental policies. Indeed, some of the most important impacts of environmental policies take place outside of the market that is targeted for regulation. Section 2 examines the optimal (efficiency-maximizing) level of environmental taxes. Section 3 analyzes the impacts of environmental tax reforms, concentrating on revenue-neutral policies in which revenues from environmental taxes are used to finance cuts in ordinary, distortionary taxes. We explore in particular the circumstances under which the 'recycling' of revenues from environmental taxes through cuts in distortionary taxes can eliminate the non-environmental costs of such reforms. Section 4 compares environmental taxes with other policy instruments including emissions quotas, performance standards, and subsidies to abatement in economies with pre-existing distortionary taxes. We first compare these instruments assuming that regulators face no uncertainties as to firms' abatement costs or the benefits of environmental improvement, and then consider how uncertainty and associated monitoring and enforcement costs affect the choice among alternative policy instruments. Section 5 concentrates on the trade-offs between efficiency and distribution in a second-best setting. Section 6 offers conclusions.

Abstract:
This paper notes that market failure, policy failures, and population pressures are major sources of environmental degradation and that linkages between economic activities and the environment exist at the levels of macroeconomic objectives, macroeconomic policy instruments, implementation of environmental policies, and measurement of economic activity. This paper also points out that fiscal instruments can, and indeed do, play a significant role in resolving environmental problems. In addition, market-based solutions, including pollution permits, also have merit. This paper further points out that implementing environmental policies poses considerable challenges for public policymakers and concludes by suggesting areas for further research.

Abstract:
We develop a model of human capital formation with endogenous labor supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal schedule of the labor income tax. If the government can observe inputs into the production of human capital, subsidies on education ensure efficiency in human capital accumulation and labor taxes are more progressive than without education policies. Although the able benefit more than proportionally from education subsidies, education subsidies thus play an important role in alleviating the tax distortions in human capital accumulation induced by redistributive policies. If the government can not verify all investments in human capital, education policy offsets some but not all the tax-induced distortions on learning.

Human capital, education subsidies, progressive taxation, redistribution

Abstract:
We develop a model of human capital formation with endogenous labor supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal progressive schedule of the labor income tax and optimal capital income taxes. Subsidies on education ensure efficiency in human capital accumulation, while taxes on skilled labor help to redistribute income towards the less able. We thus provide a rationale for the widely observed presence of education subsidies. The actually observed tax codes and level of education subsidies suggest that a large part of education subsidies can be justified on these grounds.

Human capital, education subsidies, progressive taxation

Abstract:
This paper analyzes optimal linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labor income.

Human capital, labor income taxation, capital income taxation, life cycle, education subsidies

Abstract:
This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall 'life-cycle' risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.

social optimum, pension systems, risk sharing, overlapping

Abstract:
This paper explores how the costs of meeting given aggregate targets for pollution emissions change with the imposition of the requirement that key pollution-related industries be compensated for potential losses of profit from the pollution regulation. Using analytically and numerically solved equilibrium models, we compare the incidence and costs of emissions taxes, fuel (intermediate input) taxes, performance standards and mandated technologies in the absence and presence of this compensation requirement. Compensation is provided either through industry tax credits or industry-specific cuts in capital tax rates. We decompose the added costs from the compensation requirement into (1) an increase in intrinsic abatement cost, reflecting a lowered efficiency of pollution abatement, and (2) a lump-sum compensation cost that captures the efficiency costs of financing the compensation. The compensation requirement affects these components differently, depending on the policy instrument involved and the required extent of pollution abatement. As a result, it can change the cost-rankings of the different instruments. In particular, when compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under the command-and control policies (performance standards and mandated technologies) - a reflection of the higher compensation requirements under the emissions tax. When the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to lose its status as the least costly instrument and to become more costly than command and control policies. In contrast, when required abatement is extensive, the emissions tax again becomes the most-cost effective instrument because of its advantages in terms of lower intrinsic abatement cost.

environmental instrument choice, pollution control, compensation requirements, emissions abatement costs

Abstract:
This study presents some new empirical evidence on the determination of interest rates in the United States. The empirical results generally support the view that fiscal deficits raise real interest rates. The paper offers various reasons why several previous empirical studies have failed to find a significant positive effect of budget deficits on domestic interest rates in the United States. In addition, it discusses both theoretical considerations and other empirical evidence that suggest, that neither the response of private saving nor international capital mobility prevents budget deficits from raising interest rates.

Abstract:
This paper describes how growing economic integration within the European Community increases the scope for any one EC country to impose adverse externalities on other member countries by manipulating its capital income taxes. After examining several alternatives to concerted tax harmonization, the paper concludes that there is a need to harmonize capital income taxes within the EC as the Community moves toward a unified market with free capital movements and fixed nominal exchange rates. The harmonization process could start by agreeing on the tax base, followed by setting minimum statutory rates.

Abstract:
This paper explores how the tax treatment of investment and savings affects international capital flows as well as national and global welfare. Focusing on portfolio investment, it evaluates the international effects of capital income taxes in the United States and Japan. During the 1980s, these taxes encouraged capital flows to the United States both by favoring investment in that country and by harming the country`s relative savings performance. The paper concludes that the internationalization of financial markets calls for a careful study of the international implications of domestic tax policies.

Abstract:
The most cost-effective policies for achieving CO2 abatement (e.g., carbon taxes) fail to get off the ground politically because of unacceptable distributional consequences. This paper explores CO2 abatement policies designed to address distributional concerns. Using an intertemporal numerical general equilibrium model of the U.S., we examine how efficiency costs change when these policies include features that neutralize adverse impacts on energy industries. We find that avoiding adverse impacts on profits and equity values in fossil fuel industries involves a relatively small efficiency cost. This stems from the fact that CO2 abatement policies have the potential to generate revenues that are very large relative to the potential loss of profit. By enabling firms to retain only a very small fraction of these potential revenues, the government can protect firms' profits and equity values. Thus, the government needs to grandfather only a small percentage of CO2 emissions permits or, similarly, must exempt only a small fraction of emissions from the base of a carbon tax. These policies involve a small sacrifice of potential government revenue. Such revenue has an efficiency value because it can finance cuts in pre-existing distortionary taxes. Because the revenue sacrifice is small, the efficiency cost is small as well. We also find that there is a very large difference between preserving firms' profits and preserving their tax payments. Offsetting producers' carbon tax payments on a dollar-for-dollar basis (through cuts in corporate tax rates, for example) substantially overcompensates firms, raising profits and equity values significantly relative to the unregulated situation. This reflects the fact that producers can shift onto consumers most of the burden from a carbon tax. The efficiency costs of such policies are far greater than the costs of policies that do not overcompensate firms.

Abstract:
This paper reviews the pros and cons of institutionalized constraints limiting the freedom of national budgetary policies within an Economic and Monetary Union (EMU) in Europe. The issue is approached from three angles: the influence of EMU on (i) budget discipline; (ii) intergenerational equity and intertemporal efficiency; and (iii) macroeconomic stabilization. The desirability of constraints on budgetary policy is related to the arrangements for EMU-wide monetary policy, the credibility of a no-bailout clause among member states, and progress in the area of supply-side policies.

Abstract:
This paper explores how the specification of the earnings function impacts the optimal tax treatment of human capital. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if most of the education is enjoyed by high ability households, education should be taxed in order to redistribute resources to the poor. The paper identifies the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized. In particular, with non-linear tax instruments, education should be weakly separable from labor and ability in the earnings function. With linear taxes, education should also feature a constant elasticity in a weakly separable earnings function.

optimal linear and non-linear taxation, optimal education subsidies, human capital, earnings function

Abstract:
This paper analyses the impact of capital income taxes on financial and investment decisions of corporations. Extending Sinn's (1991) nucleus theory of the firm with debt finance, the model determines the optimal sources of finance (debt, newly issued equity or retained earnings), the optimal use of the investment's earnings (dividends, retentions, interest payments or debt redemption), and the optimal capital accumulation throughout the life cycle of the firm.

tax burden, capital income taxation, firm behaviour

Abstract:
This paper analyzes several issues regarding the measurement of saving and concludes that the observed declines in national, private, and personal saving rates in the United States cannot be attributed to measurement problems. It then examines several factors that seem to have been behind the decline in U.S. personal saving. It suggests that structural changes in capital markets as well as improvements in wealth positions, in the living standards of the elderly, in social security pensions, and in private and public insurance mechanisms all contributed to the declining trend in personal saving. Empirical results suggest that demographic factors may also have played a major role.

Abstract:
This paper examines how two types of fiscal policy models, namely, dynamic macroeconomic models and applied general equilibrium models, have integrated macro- and microeconomic relationships within a framework of intertemporal equilibrium. After emphasizing the potential advantages of integrating macro- and microeconomic relations, the study discusses the limitations of intertemporal equilibrium models--in particular the weaknesses of saving and investment theories incorporated in the models. It concludes that, despite recent important advances, policymakers need to exercise caution when they interpret results derived from these models.

Abstract:
This paper explores how tax policy affects the level and allocation of national savings in the United States. It argues that the effect of taxes on the overall private saving level is relatively small and uncertain and that raising public saving is the most direct and efficient way to raise national saving. However, the tax system has a powerful impact on the composition of savings and investment. The paper suggests various specific tax measures that would not only raise government revenue but also enhance the efficiency of savings and investment.

Abstract:
Stand-alone collective pension schemes are an attractive third way between the extensive public pay-as-you-go schemes of continental Europe and the individual pension plans that are increasingly replacing defined-benefit plans in the Anglo-Saxon countries. If a number of further reforms are implemented, Dutch pension funds can evolve into stand-alone pension schemes that better fit the needs of employees in a dynamic, innovative economy.

pension schemes, aging, labor market, human capital

Abstract:
This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall 'life-cycle' risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk-aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.

Social optimum, pension systems, risk sharing, overlapping generations

Abstract:
This paper models unemployment as a binding non-negativity constraint on hours worked in an optimal income tax problem with quasi-linear preferences. We show that bunching of workers resulting from this binding constraint provides a more convincing description of the bottom of the labor market than bunching due to violation of the second-order condition for individual optimization. Although a binding non-negativity constraint destroys the closed form solution of optimal marginal tax rates, the optimal tax problem can be characterized in a two-dimensional diagram in which comparative statics can be performed in straightforward fashion.

Abstract:
The evidence on international capital immobility is extensive, ranging from the correlations between domestic savings and investment pointed out by Feldstein-Horioka (1980), to real interest differentials across countries, to the lack of international portfolio diversification. To what degree does capital immobility modify past results forecasting that small open economies should not tax savings or investment? The answer depends on the cause of this immobility. We argue that asymmetric information between countries provides the most plausible explanation for the above observations. When we examine optimal tax policy in an open economy allowing for asymmetric information, rather than simply finding that savings and investment should not be taxed, we now forecast government subsidies to foreign acquisitions of domestic firms. Some omitted factors that would argue against subsidizing foreign acquisitions are explored briefly.

Abstract:
The evidence on international capital immobility is extensive, including the lack of international portfolio diversification, real interest differentials across countries, and the high correlation between domestic savings and investment. We develop a model with asymmetric information between countries that helps rationalize all the above observations and then examine the implications of this model for optimal domestic tax policy. Without asymmetric information, past work showed that small open economies should not impose corporate income taxes. With asymmetric information, the optimal policy instead involves government subsidies to capital imports. Some omitted factors that argue against subsidizing capital imports are explored briefly.

Abstract:
This paper analyzes the implications of growing international economic integration for the conduct of structural policy. Section I points out that the internationalization of financial intermediation has raised the welfare costs associated with domestic distortions. The growing importance of structural policies in affecting domestic demand in a more integrated world economy is discussed in Section II. It is shown that domestic distortions reduce the effect of expansionary policy on the domestic economy. Section III examines the international transmission of unilateral structural policies. Section IV discusses the need for the international coordination of structural policies. Section V identifies structural areas in which international policy coordination is most urgent.

Abstract:
This paper analyzes optimal linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labor income.

Human capital, labor income taxation, capital income taxation, life cycle, education subsidies

Abstract:
There has been keen interest in recent years in environmentally motivated or 'green' tax reforms. This paper employs analytical and numerical general equilibrium models to investigate the costs of such reforms, concentrating on the question of whether these costs can be eliminated when revenues from new environmental taxes are devoted to cuts in marginal income tax rates. A distinguishing feature of the analytical model is its attention to the role of pre-existing inefficiencies in the tax treatment of labor and capital and the associated role of tax-shifting. This model indicates how the prospects for a zero- or negative-cost environmental tax reform are enhanced to the extent that environmental tax reforms shift the tax burden toward the less efficient (undertaxed) factor. Results from the numerical model are interpreted in light of the analytical model's findings. These results indicate that the revenue- neutral substitution of Btu or gasoline taxes for typical income taxes usually entails positive gross costs to the economy. In the case of the gasoline tax, a significant tax shifting effect serves to lower the policy's gross costs. This accounts for the lower gross cost of the gasoline tax compared with the Btu tax. Under neither policy is tax-shifting substantial enough to eliminate the overall gross costs.

Abstract:
This paper explores how the costs of meeting given aggregate targets for pollution emissions change with the imposition of the requirement that key pollution-related industries be compensated for potential losses of profit from the pollution regulation. Using analytically and numerically solved equilibrium models, we compare the incidence and economy-wide costs of emissions taxes, fuel (intermediate input) taxes, performance standards and mandated technologies in the absence and presence of this compensation requirement. Compensation is provided either through lump-sum industry tax credits or industry-specific cuts in capital tax rates. We decompose the added costs from the compensation requirement into (1) an increase in intrinsic abatement cost, reflecting a lowered efficiency of pollution abatement, and (2) a lump-sum compensation cost that captures the efficiency costs of financing the compensation. The compensation requirement affects these components differently and thus can alter the cost-rankings of policies. When compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under performance standards and mandated technologies -- a reflection of the emission tax's higher compensation requirements. If in this setting the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to become more costly than command and control policies. In contrast, if required abatement is extensive, the emissions tax emerges as the most cost-effective policy because its relatively low intrinsic abatement costs assume greater importance.

Abstract:
We explore the role of firms in insuring risk-averse workers. As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are sufficiently risk averse and the firm can base incentive payments on good information. Competition, however, may allow the spot market and explicit contracts to crowd out implicit insurance provided by the firm, even though the latter yields higher welfare. We explain why different governance structures coexist in quite homogeneous industries.

Insurance, implicit contracts, moral hazard, principal agent, commitment, shirking

Abstract:
This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labor supply. MIMIC combines modern labor-market theories, a firm empirical foundation detailed description of Dutch labor-market institutions. We develop a small aggregate model which contains the core of MIMIC, namely wage setting, job matching, labor supply demand. In addition to illustrating the main economic mechanisms in MIMIC shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms. Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment quality and quantity of labor supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply but are less effective in reducing unemployment and in raising unskilled employment and female labor supply.

Abstract:
We explore the dynamics of public debt in the presence of political shocks, in the form of shocks to preferences for public spending. Under commitment, optimal stabilization is obtained by combining an inflation target that is contingent on the political shock with a debt target that forces the government to fully absorb the political shock in the period in which it occurs. With only a shock-contingent inflation target, the political shock is spread out over time through debt policy. In the absence of any targets, a conservative central bank can enhance stabilization. If we extend the basic two-period model to an infinite horizon, this result is preserved. Moreover, under rather general circumstances the government tends to decumulate debt over time, so that in the long run all targets (for inflation, output and public spending) are attained. A failure to commit monetary policy introduces an additional distortion into the model, which leads the government to decumulate debt at a faster rate.

Political shocks, public debt, commmitment, discretion, inflation targets, debt targets, central bank conservatism

Abstract:
This Paper explores the optimal role of the tax system in alleviating labor-market imperfections and raising revenue. For this purpose, the standard search model of the labor market is extended by introducing scarce entrepreneurial talent and arbitrage between the supply and demand. We study how these extensions affect the following two major implications of the standard model: (1) only the ad valorem component of the wage tax should be employed to raise revenue; (2) the optimal tax system should not distort labor-market tightness.

Labor market, optimal tax system, search model

Abstract:
Many pollution-related industries wield strong political influence and can effectively veto policy initiatives that would harm their profits. A politically realistic approach to environmental policy therefore seems to require the alleviation of significant profitlosses to these industries. The regulatory authority can do this by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax. However, such policies compel the government to forego an efficient potential revenue source and to rely more heavily on ordinary distortionary taxes. As a result, achieving distributional objectives comes at a cost in terms of efficiency. Using analytically and numerically solved equilibrium models, we analyze the efficiency costs implied by the distributional constraint that adverse impacts on profits in particular industries must be avoided. Both models indicate that the efficiency cost implied by this constraint dwarfs the other efficiency costs when the required amount of abatement is very small. When the abatement requirement becomes more extensive, however, the cost of this constraint diminishes relative to the other efficiency costs of pollution-control. We also calculate the compensation ratio: the share of potential policy revenue that the government must forego to protect the industries in question. We show how this ratio is affected by the extent of abatement, supply and demand elasticities, and the potential for end-of-pipe treatment. One definition of this ratio corresponds to the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries. Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration's Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits. Our models also highlight significant differences between gross and net policy revenues: when abatement is extensive, a large fraction of the revenue collected from emissions permits or taxes is offset by the revenue-loss from erosion of the base of existing factor taxes.

Efficiency, costs, environmental tax, pollution, environmental policy

Abstract:
A politically realistic approach to environmental policy seems to require avoiding significant profit-losses in major pollution-related industries. The government can avoid such losses by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax. However, preventing profit-losses in this way involves an efficiency cost because it compels the government to forego especially efficient sources of revenue and to rely more heavily on ordinary, distortionary taxes. Using analytically and numerically solved equilibrium models, we analyze these efficiency costs. We find that when the required amount of abatement is small, the efficiency cost implied by the profits-constraint dwarfs the other efficiency costs of pollution-control. When the abatement requirement becomes more extensive, the cost of this constraint diminishes relative to the other efficiency costs. We also calculate and analyze the determinants of the 'gross compensation ratio' - the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries. Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration's Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits.

Abstract:
This paper uses a dynamic computable general equilibrium model to compare, in an economy open to international capital flows, the effects of two U.S. policies intended to promote domestic capital formation. The two policies -- the introduction of an investment tax credit (ITC) and a reduction in the statutory corporate income tax rate -- differ in their treatment of old (existing) and new capital. The model features adjustment dynamics, intertemporal optimization by U.S. and foreign households and firms endowed with model-consistent expectations, imperfect substitution between domestic and foreign assets in portfolios, an integrated treatment of the current and capital accounts of the balance of payments, and industry disaggregation in the United States. We find that the two policies (scaled to imply the same revenue cost) differ in their consequences for foreign and domestic welfare, the balance of payments accounts, international competitiveness, and U.S. industrial structure. The ITC produces larger domestic welfare gains because it is more effective in reducing intertemporal distortions, while the two policies have similar implications for intersectoral efficiency. From the point of view of domestic welfare, the relative attractiveness of the ITC is enhanced when international capital mobility is taken into account, a reflection of international transfers of wealth associated with foreign ownership of part of the U.S. capital stock. Whereas reducing the corporate tax rate improves the trade balance initially, introducing the ITC causes a deterioration of the trade balance in the short run. Reflecting a lower real exchange rate, export-oriented sectors perform better relative to non-tradable industries under a lower corporate tax rate than in the presence of the lTC, especially in the short run.

Abstract:
In order to explore the optimal taxation of low-skilled labour, we extend the standard model of optimal non-linear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search, an exogenous welfare benefit, and a non-utilitarian social welfare function. In trading of more low-skilled employment against more work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Positive marginal tax rates at the bottom may help to encourage job search if this search is taxed on a net basis. Lower welfare benefits and search costs tend to reduce marginal tax rates throughout the skill distribution.

Labour market search, social assistance, unemployment, low-skilled labour, non-linear taxation, participation margin, bunching

Abstract:
This Paper explores the optimal interaction between the tax system and unemployment compensation in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. We find that the optimal search subsidy (i.e., the difference between the in-work benefit and the unemployment benefit) increases if, for efficient agents, the participation constraint (governing job search) becomes relatively more important than the incentive compatibility constraint (determining hours worked). The relation between unemployment benefits and the optimal level of in-work benefits (the number of people exerting positive work effort) is U (inversely U) shaped.

Search, in-work tax benefits, unemployment compensation

Abstract:
In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal non-linear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.

Abstract:
A number of trends are changing the nature of social risks and increase the importance of human capital, adaptability, and flexibility. This article discusses the usefulness of a life-course perspective in developing proactive social policies that better fit the changing life cycles of individuals who combine formal work with other activities on transitional labor markets. It pays special attention to the accumulation and maintenance of human capital over the life course and stresses that reconciliation of work and family goes beyond child care facilities and parental leave, and involves the entire life course. In particular, longer and deeper involvement in paid employment allows people to exploit their longer life to reconcile the two ambitions of, first, investing in the next generation as a parent and, second, pursuing a fulfilling career in paid work in which one keeps learning. Greater flexibility of working time over the life course requires more individual responsibility for financing leave. Moreover, rather than shielding older insiders through employment protection, labor market institutions should enable parents of young children to easily enter and remain in the labor market. Finally, more activating social assistance and in-work benefits should replace the passive income support for breadwinners that results in high minimum wage floors. (JEL codes: H30, J10, J20)

Life course, human capital, work and family, fertility, longevity, social risks, labor market, retirement

Abstract:
A number of trends are changing the nature of social risks and increase the importance of human capital, adaptability and flexibility. This paper discusses the usefulness of a lifecourse perspective in developing proactive social policies that better fit the changing life cycles of individuals who combine formal work with other activities on transitional labor markets. It pays special attention to the accumulation and maintenance of human capital over the life course and stresses that reconciliation of work and family goes beyond childcare facilities and parental leave, and involves the entire life course. In particular, longer and deeper involvement in paid employment allows people to exploit their longer life to reconcile the two ambitions of, first, investing in the next generation as a parent and, second, pursuing a fulfilling career in paid work in which one keeps learning. Greater flexibility of working time over the life course requires more individual responsibility for financing leave. Moreover, rather than shielding older insiders through employment protection, labor-market institutions should enable parents of young children to easily enter and remain in the labor market. Finally, more activating social assistance and inwork benefits should replace the passive income support for breadwinners that results in high minimum wage floors.

Abstract:
We investigate intergenerational risk sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. We consider shocks in productivity, depreciation of capital and inflation. The funded pension pillar can be either defined contribution or defined benefit, with benefits defined in real or nominal terms or indexed to wages. Optimal intergenerational risk sharing can be achieved only in the presence of a defined benefit pension system with appropriate restrictions on investment policy of the funded pillar. In this way, both generations have similar exposures to financial and human capital risks.

(funded) pensions, fiscal policy, nominal assets, overlapping generations, risk sharing

Abstract:
Rising longevity and falling fertility threaten the sustainability of pay-as-you-go pension chemes. This paper shows that maintaining the intergenerational balance in the Dutch pay-as-you-go pension scheme in the face of increased longevity since the introduction of the scheme in 1957 would have required a gradual increase of the retirement age to at least 68 years for the generation born in 1945. Furthermore, we show that projected increases in labour-force participation rates do not generate sufficient additional tax revenues to subsitute for the dearth of human capital caused by falling fertility rates.

public pension, pay-as-you-go system

Abstract:
Higher life expectancy and feminization of work have changed the life course. These developments require changes in the way society organizes work and accumulates and maintains human capital over the life cycle. This paper describes various reforms aimed at preventing Europe from becoming a gerontocracy. It also discusses the political challenges associated with reforms aimed at lengthening the working life and protecting fertility.

aging, fertility, longevity, feminization of work, life course, human capital, political economy

Abstract:
We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the funded tier is key for the way in which risks are shared over the various generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the risks. However, the existence of wage-indexed bonds combined with a pension system with a fully-funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.

defined wage-indexed benefits, funded pensions, overlapping generations, risk sharing, wage-indexed bonds

Abstract:
This paper discusses recent reforms of social insurance in the Netherlands. It describes how a serious economic crisis in the beginning of the 1980s set the stage for the subsequent reform process. The most fundamental reforms were introduced in the areas of sickness insurance, which was privatized, and disability insurance, which now involves experience rating. After exploring various challenges affecting the future of social protection, the paper discusses various remaining policy options.

Social insurance, the Netherlands, privatization, competition, sickness insurance, disability insurance

Abstract:
The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing in a fiscal union, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilize country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

Abstract:
This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labor supply. MIMIC combines modern labor-market theories, a firm empirical foundation, and a detailed description of Dutch labor-market institutions. We develop a small aggregate model, which contains the core of MIMIC, namely wage setting, job matching, labor supply and labor demand. In addition to illustrating the main economic mechanisms in MIMIC, the small model shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms.

Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment but damages the quality and quantity of labor supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply but are less effective in reducing unemployment and in raising unskilled employment and female labor supply.

Abstract:
This paper explores how fiscal and monetary policy interact if commitment and access to lump-sum taxation are limited. We analyze how equilibrium outcomes for inflation, employment, and public spending are affected by the structural features of an economy, such as money holdings, outstanding public debt, labor-market distortions, society's preferences, and the nature of the policy game. In a normative vein, we compare society's welfare across various institutional settings and investigate how society should optimally adjust the preferences of policymakers.

Abstract:
This paper employs analytical and numerical general equilibrium models to examine the optimal setting of environmental taxes in the presence of pre-existing distortionary taxes. Both models indicate, contrary to what several analysts have suggested, that the optimal environmental tax rate in this setting is less than the rate implied by the "Pigovian principle," which would equate the tax to the marginal environmental damage from pollution. Numerical results show that previous studies may have seriously overstated the size of the optimal carbon tax by disregarding pre-existing taxes, and that the optimal carbon tax can be negative when revenues from the tax are recycled in a lump-sum fashion.

Abstract:
This paper deals with the so-called "double dividend" of an environmental tax reform. Using a model with only labor and polluting inputs as factors of production, we find that society faces a trade-off between internalizing environmental externalities and raising revenues in the least distortionary way. However, if capital enters the production structure, an ecological tax reform may render the tax structure more efficient from a non-environmental point of view, thereby raising not only environmental quality but also private incomes.