Chapter 7 Tax Policy - JEAN...

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pisani-ferry december 20121

Chapter 7

Tax policy

Introduction

At the core of politics and sovereignty

"Taxation without representation is tyranny“

James Otis (1725-1783), US lawyer and politician at the time of the American

Revolution

« Pour l’entretien de la force publique, et pour les dépenses

de l’administration, une contribution commune est

indispensable; elle doit être également répartie entre les

citoyens, en raison de leurs facultés ».

Déclaration des droits de l’Homme et du Citoyen, Article 13, 1789

pisani-ferry december 2012 2

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Taxation is VERY

political

Why taxation?

• Because governments seldom charge for their services –

hence the need for financing them through taxation

• Because taxes are instruments

– For allocative purposes – e.g. green taxes

– For distributive purposes – e.g. Income taxes

• Economic theory suggests tax policies should aim at

minimising distortions but this often conflicts with other

purposes – see Margaret Thatcher’s fall over the poll tax

• In few other fields are economics and politics as tightly

intertwined


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Outline

6.1 Issues

• What is taxation about?

• Which taxes?

• Redistribution and efficiency

6.2 Theories

• Tax incidence

• Social losses and distortions

• Optimum taxation

• Corrective taxation

• Taxation in open economies

6.3 Policies

• Efficiency

• Equity

• International coordination


6.1 Issues


• Which taxes?


6.2 Theories

• Tax incidence





6.3 Policies

• Efficiency

• Equity



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What is taxation about?

The Musgravian trinity applies:

• Allocation

• Minimisation of distortions in the financing of public goods

• Correction of market failures

• Redistribution

• Tax policy is not the only instrument (an alternative is transfers)

but it contributes to achieving desired distribution of income and

wealth

• It is generally accepted that taxation should be either

proportional or progressive, but not regressive

• Stabilisation

• Tax policy contributes to automatic stabilisation (to an extent

that depends on income elasticities)

Some trade-offs (e.g. cigarettes)


How much?

pisani-ferry december 2012 8Source : OECD

Total tax revenues in selected countries, percentage of GDP, 1970-2010

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How much within the EU?


Total tax revenues in EU countries, percentage of GDP, 2010

Source: European Commission

Who collects taxes?


Distribution of tax revenues by level of government, selected countries, 2010


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Which taxes?

Direct taxesHouseholds

- Personal income tax

- Social security contributions

- Property taxes

- Inheritance taxes

- Wealth taxes

Companies

-Corporate income tax

- Local business taxes

- Social security contributions

Indirect taxes- VAT

– Excise taxes

– Energy taxes

– Environmental taxes

Atkinson (1977) : direct taxes are those that can be personalised (adapted to the

taxpayer’s characteristics)

Only direct taxes are to be used for redistribution purposes

Obvious? If so, why do we have two VAT rates?

Genuine taxes or social security

contributions? Bismarckian vs.

Beveridgian systems

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Which taxes? Evidence


Breakdown of taxation by nature of revenues, EU countries, 2010


Who is

Bismackian?

Who is

Beveridgian?

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Changes over time


• Rise in VAT and social security contributions

• Decline in traditional consumption taxes and (since the 1980s) income taxes

Structure of taxation by tax instrument, OECD (unweighted), 1965-2008

Source: OECD

14

Who pays?


Implicit tax rates, % of GDP, 2010

Source: EC, Taxation trends in the European Union, 2012. * Unweighted average.

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The case of developing countries


Developing countries generally exhibit lower taxation (e.g. 10 to 20% of GDP

in West Africa) and they rely much more on indirect taxes, especially customs duties

Redistribution and efficiency

Share of first decile in national

income, USA, 1917-2007 Zooming in: decomposition


Source: Atkinson, Piketty and Saez (2010)

The share of

the top 1%

has increased

from 10% to

almost 25%

The share

of the top

10% has

increased

from 35%

to 50%

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Significant differences across countries


Taxation plays an important role in determining disposable income inequalities

But the structure of income changes


Share of national income of the .1 per cent fractile, USA, 1916-2007

Source: Atkinson, Piketty and Saez (2010)

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Graphique 7.10 – Variation (en %) de la part du rev enu total en faveur du premier quintile derevenu

0

0,5

1

1,5

2

2,5

3

3,5

Allemagne Belgique France Italie Irlande Royaume-Uni

Prestations Impôts

Lecture : ce graphique indique la variation de la part cumulée dans le revenu du premier quintile de la population due aux impôtsprélevés et aux prestations distribuées.

Source : d’après Bourguignon (1998).pisani-ferry december 2012 19

Some countries redistribute more in spite of

having lower taxes


Redistribution vs. efficiency:

what matters?

Marginal tax rate T’(R)

Incentives

Efficiency

Average tax rate = T(R)/R

Redistribution

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6.1 Issues


• Which taxes?


6.2 Theories

• Tax incidence





6.3 Policies

• Efficiency

• Equity




Tax incidence

Q

P

PE

PE’

PE’-t

Supply

Demand

t

E

E’

Tax on supply

Q

P

PE

PE’’+t

PE’’

Supply

Demandt

E

E’’

Tax on demand

Taxation is rarely borne by the particular taxpayer who writes the check

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Tax incidence: polar cases

Supply tax: dts > 0

• if εs = 0 (inelastic supply), the net-of-

taxes price does not change

tax is borne by the supply side

• if εs ≈ ∞ (elastic supply), the net-of-

taxes price increases: dP/P = dts/(1-ts) >0

tax is borne by the demand side

Demand tax: dtd > 0

• ifεd = 0 (inelastic demand), the net-of-taxes

price does not change, the tax is entirely

passed on to the consumer

tax is borne by the demand side

• ifεd ≈ ∞ (elastic demand), the net-of-taxes

price diminishes by dP/P = -dtd/(1+td) >0

tax is borne by the supply side


Application: The effect of a cut in employers’

social security contributions

L

WSupplyDemand

EE’

L

W

Supply

Demand

E

E’

At the level of the minimum wage At higher wage levels

If the presence of excess unskilled labour, cuts in social security contributions result

in higher employment at the level of the minimum wage

and in higher wages at higher wage levels

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Tax incidence in a general equilibrium contextAn example: effect of a consumption tax on good 1

Before price adjustment After price adjustment


C1

P1C1+P2C2=R

0

P1(1+t)C1+P2C2=R

E

E’

C2

C1

C2

P1C1+P2C2=R

0

P’1(1+t)C1+P’2C2=R

E

E’’

A tax on the consumption of good 1 affects relative prices but also real consumer income.

This results in a change in the prices of both goods, which in turn affect real consumer income

The net effect on good 2 consumption is ambiguous


Application: Who pays taxes on capital?

k

r

r0

r1

k1

ks

kd

tw, ts

E0

E1

k0 k

r

r0

r1

k1

ks

kd

tis

E0

E1

k0

A tax on household capital income A rise in the corporate income tax

In both cases the capital stock decreases, which affects labour productivity and hence

labour income.

In an open economy setting capital supply is very elastic (at the limit infinitely elastic at

the prevailing interest rate r. A tax on corporate income is entirely borne by labour.

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Example: incidence of rent subsidies

pisani-ferry december 2012 27Source: Fack (2005)

Significant increase over time

of subsidies to low-income

housing in France

But as a

consequence rents

for low-income

households have

increased

Tax incidence in a general equilibrium framework:

The case of income from savings

Capital market Labour market


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Social losses and distortions

A consumption tax Social losses


Q

P

D

B C

Supply

Demand

E

A

F

Q0Q1

P0

P1s

P1d

t

Surplus Without tax

With tax Difference

Consumers A+B+C A -(B+C)

Producers D+E+F F -(D+E)

Government 0 B+D + (B+D)

Total A+B+C+D+E+F

A+B+D+F

- (C+E)

C + E is the Harberger triangle, whose surface corresponds to the deadweight loss

implied by taxation

Taxation is distortionary

Computing social losses

• The social loss (the surface of the Harberger triangle) is:

• Implications

– Distortions are quadratic in the tax rate

– Distortions on high-elasticity goods are higher

• Minimising distortions leads to the Ramsey rule which states

that taxation should be inversely proportional to tax

elasticities:

• This may conflict with equity (leads to tax essential goods,

unskilled labour rather than capital, etc..)


+=

sdk

p

t

εε11

+=

DS

DS

P

QtL

εεεε

0

02

2

1

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Taxation, incentives and tax returns:

The Laffer curve



Theory and practice

The Russian 2001 tax reform

However the claim that in the 1970s the US was in the prohibitive range proved unfounded

10

15

20

25

30

35

1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Ivanova, Keen and Klemm (2005).

Top

mar

gina

l PIT

rat

e (%

)

2,2

2,4

2,6

2,8

3

3,2

3,4

3,6

PIT

revenues (% of G

DP

)

Top marginal tax rate (%) PIT revenues (% of GDP)

The Laffer curve

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Optimal taxation

Mirlees (1971) : addresses the efficiency-equity trade-off through maximising social

utility subject to income and incentive constraints

– Utility: weighted average of individual utilities (giving more weight to the poor)

– Income: revenue to be raised

– Incentive: efficiency dimensions

Assumes population is a continuum of individuals indexed by productivity w.

Question: should one tax the low-productivity individuals (for efficiency) or the high-

productivity ones (for equity?)

– T’(w) : Marginal tax rate for individuals whose productivity is w ;

– E(w) : decreasing function of the elasticity of labour supply (Ramsey principle);

– R(w) : weight of w-productivity individuals in the social utility function;

– H(w) : structure of the population (decreases with the size of the w-productivity

population; increases with the size of the population whose productivity exceeds w) ;

– F(w) cumulated distribution

)()()()('1

)('wHwRwE

wT

wT =− )(

)(1)(

wwf

wFwH

−=

Implications

• Mirlees results:

– Optimal tax rate is approximately linear (constant marginal rate)

– Marginal tax rates are rather low

– Limited redistributive properties

• Results however depend on social utility

• Refined versions of Mirlees model result in U-shaped marginal taxation schedule


Tax rate Average Marginal

Median 6 21

Top decile 14 20

Top percentile 16 17

Source: Atkinson and Stiglitz, 1980

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Corrective taxation

• In the presence of market failures (when agents do not

internalise externalities) Pigouvian taxation helps aligning

private costs with social costs

• Examples

– Tax on London chimneys (Pigou 1920)

– London congestion charge

– Carbon taxes

– Transaction taxes?

• Goal is not to raise revenue but to correct incentives

• Pigouvian taxation an alternative to regulation


What to do with the money?

• Pigouvian tax rate should be set in view of incentive objectives, not in view of revenues (optimal rate should be set in order to equalise marginal distortion across taxes)

• Solutions to dispense of revenues– Compensate taxpayers with lump-sum allowance (e.g.

grandfathering for CO2 emissions)

– Reduce other taxes (‘double dividend’), e.g. taxes on labour

– Finance public goods, possibly in the same field (e.g. research on climate change mitigation)

• Successful Pigouvian taxes are expected to shrink the tax base and therefore revenues, so double dividend approach may be self-defeating


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Taxation in open economies and

tax competition

• Standard taxation models assume goods and factors are immobile

• Mobility (of labour; capital; and goods and services) raises issues of tax

competition

• Applies

– Across jurisdictions within countries (local taxation). Major issue for income taxes,

business taxes

– Across countries. Increasingly significant issue for income taxes, corporate income

taxes

• Tax competition can be viewed:

– A good thing if the government is considered a Leviathan (or just an inefficient government)

– A bad thing if the government is considered benevolent and efficient: reduced provision of

public goods, tax inequality arising from heavier taxation of less-mobile bases (low-skill labor)


Tax competition models


Tiebout (1956) :

• N jurisdictions with different tax rates and government services

• Individuals ‘vote with their feet’ and move across jurisdictions. Two effects:

– Eliminates inefficient tax / government service combinations

– Makes room for diversity (individuals group according to preferences)

Zodrow et Mieszkowski (1986):

• If all jurisdictions have similar preferences, provision of government services under

such tax competition will be lower than its optimum

• Validates ‘race to bottom’ view

Bucovetsky et Wilson (1991):

• If capital is mobile and labour is immobile, taxation will fall on labour

Baldwin et al. (2003):

• Agglomeration generates rents that are taxable

• Tax competition a way for peripheral countries to compensate disadvantage

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Tax competition in the EU


Unweighted averages

6.1 Issues


• Which taxes?


6.2 Theories

• Tax incidence





6.3 Policies

• Efficiency

• Equity



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Theory and policy

• Tax policy less influenced by economic theory than decisions

in other policy fields

• Examples:

– Bush tax cuts

– French VAT cut for restaurants

• Why?

– Some straightforward recommendations, but

– Other concerns (ex: ‘un vieil impôt est un bon impôt’)

– Tax theory concepts difficult to grasp (tax incidence)



Efficiency

Equivalence principle

• where WP is real cost of labour for the employer, Ω is net real income for the employee

• Labour demand and supply elasticitities command the variations of Ω and W/P in response to changes in tax rates (tax incidence)

Ignores that VAT is also paid on capital income and pension income (but investment isexempted from VAT)

Equivalence only applies in the long run (in the short run rigidities matter)Example: Germany 2007 • Initially lowering of social security contributions and raise of VAT• Later on led to demands for wage increases

Special cases:• Minimum wage (in France, set in real terms net of social security contributions but

gross of VAT)• Open economy

P

W

tt

tt

VATSSC

PITSSC

)1)(1(

)1)(1(

1

2

++−−=Ω

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Case study: VAT vs social contributions

First step: Y = C

• the VAT base is Y ;

• if the share of labor in value added is 2/3, the social contribution base is 2Y/3 ;

• to raise receipts of Y/5, you need a 20% VAT rate or a 30% SC rate: VAT less distorsionary (Ramsey rule).

Second step: Y = C + I

• if the share of labor in value added is 2/3, the VAT base shrinks to 2/3 Y ;

• the social contribution base is still 2Y/3

• to raise receipts of Y/5, you need a 30% VAT rate or a 30% SC rate: the two levies are equivalent.

• this corresponds to the golden rule of growth where I/Y = rK/Y = 1- wL/Y

Third step: Y = C + I + X - QM

• unchanged VAT receipts if X = QM, higher receipts if X < QM (trade deficit) ;

• however foreign suppliers may reduce their export prices following a VAT

Conclusion: impact of a substitution of VAT for employers’ contributions

• short run: increased competitiveness, reduced purchasing power

• long run: increased net wages, no impact on competitiveness neither on purchasing power (except

incomplete pass-through from foreign suppliers and/or distributional effects across industries)

VAT: increasingly popular...

Number of countries with VAT General consumption taxes in OECD countries, percentage of total revenues, 2007


0

5

10

15

20

25

30

Hu

ng

ary

Ice

lan

d

Ire

lan

d

Po

rtu

gal

Ne

w-Z

eala

nd

Po

lan

d

Gre

ec

e

Slo

vak

Re

p.

De

nm

ark

Tu

rke

y

Me

xic

o

Ne

the

rla

nd

s

Fin

lan

d

Ge

rma

ny

Sw

ed

en

No

rway

EU

15

un

we

igh

ted

OE

CD

un

we

igh

ted

Au

stri

a

UK

Cze

ch R

ep

.

Fra

nce

Be

lgiu

m

Sp

ain

Ko

rea

Luxe

mb

ou

rg

Ita

ly

Ca

nad

a

Sw

itze

rla

nd

Au

stra

lia

Jap

an

% o

f to

tal

tax r

ev

en

ue

s

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... But regressive



Case study: VAT vs sales taxAssumptions

• A producer of an intermediate input sells for EUR 100 to a producer of a final good

• The producer of the final good sells for EUR 150 to a final consumer

VAT 20%

• the intermediate input producer charges a EUR 20 VAT;

• the final good producer charges a EUR 30 VAT and recovers EUR 20 on his purchase of the

intermediate good;

• tax receipt: EUR 30.

Sales tax 20%

• the intermediate input producer does not charge any tax;

• the final good producer charges a EUR 30 sales tax;

• tax receipt: EUR 30.

Advantage of the VAT over the sales tax

• in case one producer in the value-added chain omits to declare VAT, the latter will be charged at

a later stage of the chain; there is an incentive for each firm to declare its purchases;

• however fraud on VAT is widespread (up to10% of the receipts in some Member states).

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Efficiency: the CIT case

Should firms’ profits be taxed?

•Useless is final incidence is on labor;

• Better tax capital income at the household level (less mobile than capital itself).

Justifications to CIT:

• Corporate income easier to track at the source than at the residence level;

• Try to tax only rents;

•The only way to tax foreign shareholders;

• Save the personal income tax (what if households become firms?);

• Political economy: firms don’t vote.

However the CIT raises some difficulties

• Source or residence principle? (how to tax affiliates’ benefits)

• Base: stock return (exemption of interests on debt), capital return (taxation of interests) or

just rents (exemption of interests and of « normal » dividends?


Equity

progressive or flat tax ?

Bourguigon & Chiappori (1998,

France) : PIT, constant rate of

35% necessary to fund a

universal income of 4500 euros

for a single.

Georges W. Bush (2001, 2003,

USA): unfunded tax cuts

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Marginal tax rates are often highest at the bottom of

the income distribution, resulting in poverty traps


Marginal net tax rate for a single-worker couple with two children in France (2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Multiples of minimum wage

As % of net wage

As % of gross wage

As % of supergross wage

Source: French Treasury

Evolution since the 1990s

Effective marginal income tax rate (one wage earner, family of four)

Zooming in


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Effects of the RSA allowance

pisani-ferry december 2012 51Source: French Treasury


The flat tax

Flat tax adopted Personal income tax rates Corporate income tax rate, after

reform

Change in basic allowance

After Before

Estonia 1994 26 16-33 26 Modest increase

Lithuania 1994 33 18-33 29 Substantial increase

Latvia 1997 25 25 and 10 25 Slight reduction

Russia 2001 13 12-30 37 Modest increase

Ukraine 2004 13 10-40 25 Increase

Slovak Rep. 2005 19 10-38 19 Substantial increase

Georgia 2005 12 12-20 20 Eliminated

Romania 2005 16 18-40 16 Increase

Note: Most countries do not apply pure flat tax systems since the flat rate does not apply to all tax bases. For instance, social insurance contributions are levied separately. To the extent that these contributions exceed the present value of future (contingent) social benefits, the system is not neutral, since labor and capital income are not taxed equally. See OECD (2006).

Source: Keen et al. (2006).

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Example: the 2001 reform in Russia

Marginal and average tax rates before and after Rus sian tax reform

0%

5%

10%

15%

20%

25%

30%

35%

1 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000

Ivanova, Keen and Klemm (2005).

Marginal 2000 Marginal 2001 Average 2000 Average 2001

Household income in rubbles

Progressive income tax or flat tax?


Upper marginal income tax rate Flat tax rate

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Equityaverage PIT and social contributions in 3 countries

0

10

20

30

40

50

60

70

P0-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-99.99 P.99.99-100

Percentiles of the population

Ave

rage

tax

rat

e in

%

PIT 1970 PIT 2004 Payrolls 1970 Payrolls 2000

Source: Piketty and Saez (2007).

0

10

20

30

40

50

60

70

P0-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-99.99 P.99.99-100


Ave

rage

tax

rat

e in

%



0

10

20

30

40

50

60

70

P0-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-99.99 P.99.99-100


Ave

rage

tax

rate

in %



France

UK USA


Equity: inter-temporal aspectsimpact of 2001-2006 tax cuts in the United States

Percentage change of after-tax income, in 2006

0

1

2

3

4

5

6

7

1stquintile

2ndquintile

3rdquintile

4thquintile

5thquintile

Top 10% Top 5% Top 1% Top0,5%

Top0,1%

Source: Leiserson and Rohaly (2006).

Percentage change in after-tax income for various percentiles of the population, 2010

-20

-15

-10

-5

0

5

10

1stquintile

2ndquintile

3rdquintile

4thquintile

5thquintile

Top 10% Top 5% Top 1% Top0,5%

Top0,1%

Source: Leiserson and Rohaly (2006).

No financing Lump-sum financing

Financing proportional to income Financing proportional to tax liability

Direct effect Accounting for financing

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Horizontal equity: capital income

• Avoid double taxation (labor income, capital income) :

payment in full discharge, tax credit, dual tax (Sweden).

• Distortion between tax treatment of interests and dividends

(CIT)

• Distortion between physical and human capital

• Tax expenditure = 20% of tax receipts in France, 40% in Spain,

50% in the United States.


Collection costs

Tax administration costs in percentage of net tax receipts, 1997

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

United

Sta

tes

Sweden

Irelan

dSpa

in

Canad

a UK

Nether

lands Ita

ly

Fran

ce

Germ

any

Source: Lépine (1999).

United States:

For each dollar of

tax, 22 cents paid to

layers or advisers

(average, source

Hodge et al. 2005).

Alternative

minimum tax.

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European tax coordination

• VAT: « transitory » regime (since1993) :

– Origin principle only for across-the-border purchases by households, mail-order selling and cars;

– Destination principle: general case (carrousel fraud ≅ 10% in some Member states).

• Taxation of personal capital income (January 2003) :

– « Tax package » = exchange of information (after a delay an conditional on agreements with tax heavens) + code of conduct (harmful practices)

• CIT

– « Mother-affiliate » directive against double-taxation of repatriated profits;

– Ruding report (1992): minimum tax rate

– Base harmonization and consolidation (October 2001). Enhanced cooperation? 2008.

• A European tax?


Standard VAT rates in 2008

10%

12%

14%

16%

18%

20%

22%

24%

Denm

ark

Sweden

Finlan

d

Poland

Belgium

Irelan

d

Portu

gal

Austri

aIta

ly

Bulgar

ia

Hunga

ry

Sloven

ia

Franc

e

Germ

any

Greec

e

Nethe

rland

s

Czech

Rep

.

Roman

ia

Slovak

ia

Estonia

Latvi

a

Lithu

ania

Malt

aUK

Spain

Luxe

mbo

urg

Cypru

s

Source: European Commission (2008).

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References

• Atkinson, A. (1977), “Optimal Taxation and the Direct versus Indirect Tax Controversy,” Canadian Journal of Economics, 10, pp. 590–606.

• Atkinson, A., T. Piketty and E. Saez (2010), “Top income in the long run of history”, mimeo, http://piketty.pse.ens.fr/fichiers/public/AtkinsonPikettySaez2010.pdf

• Baldwin, R., R. Forslid, P. Martin, G. Ottaviano, and F. Robert-Nicoud (2003), Economic Geography and Public Policy, Princeton University Press.

• Bourguignon, F., and D. Bureau (1999), “L’architecture des prélèvements obligatoires en France: état des lieux et voies de réforme,” Rapport pour le Conseil d’Analyse Economique, no. 17, Paris: La Documentation Française.

• Bourguignon, F., and P.-A. Chiappori (1998), “Fiscalité et redistribution,” Revue Française d’Economie, 13, pp.1–64.

• Bucovetsky, S., and J.D. Wilson, (1991), “Tax Competition with Two Tax Instruments,” Regional Science and Urban Economics, 21, pp. 333–50.

• Conseil des prélèvements obligatoires (2011), Prélèvements obligatoires sur les ménages: progressivité et effetsredistributifs”, Rapport, mai.

• Fack, Gabrielle (2005), "Pourquoi les ménages à bas revenus paient-ils des loyers de plus en plus élevés ? L'incidence des aides au logement en France (1973-2002)", Economie et Statistique n°381-382, October .

• Fribourg, Michaël (2011), “Impôt sur le revenu, impôt de solidarité sur la fortune et équité fiscale”, Rapport du Conseil des prélèvements obligatoires, mai.

• Laffer A. (2004), “The Laffer Curve: Past, and Present Future,” Backgrounder no. 1765, Washington DC: The Heritage Foundation, available at www.heritage.org.

• Mirrlees, J. (1971), “An Exploration of the Theory of Optimal Income Taxation,” Review of Economic studies, 38, pp. 175–208.

• Olson, M. (1969), “The Principle of ‘Fiscal Equivalence’: The Division of Responsibilities among Different Levels of Government,” American Economic Review, 59, pp. 479–87.

• Salanié, B. (2003), The Economics of Taxation, MIT Press.

• Tiebout, Ch. (1956), “A pure theory of local expenditures,” Journal of Political Economy, 64, pp. 416–24.

• Vasseur, Daniel (2011), “Les effets redistributifs des systèmes fiscalo-sociaux: éléments de comparaison internationale”, Rapport du Conseil des prélèvements obligatoires, mai.

• Zodrow, G., and P. Mieszkowski (1986), “Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods,” Journal of Urban Economics, 19, pp. 356–70.


Appendix: The redistributive

properties of the French tax system

in international perspective


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32

Primary income inequality grew

significantly in the 2000s


The 90%

The 1%

The .1%

The .01%

Source : Conseil des prélèvements obligatoires (2011), based on Landais

Main characteristics• High level of taxation (43.5% of GDP / OECD 35.8%)

• Low income taxation (F: 7.4% of GDP / OECD: 9.4%)

• High social security contribution (16.1% / 9.1%)

• High property taxation (3.5% / 1.9%)

• Average taxation of consumption and corporate income


Source: Vasseur (2011)

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Taxes on labour, capital and

consumption (2007)

0

10

20

30

40

50

Labour Capital Consumption

France

EU25

Germany

UK


- France taxes labour and capital more than the rest of the EU

Implicit taxation rates on labour, capital and consumption


Income inequality somewhat below

OECD average



66

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34

Lower inequality mostly attributable to

higher income at the bottom


Source: Vasseur (2011)67

The impact of taxes and transfers (1):

significant redistribution through transfers

0

5

10

15

20

25

30

35

40

45

50

Sweden Germany France UK US

Imact of transfers

Impact of taxes

Gini (disposable income)

pisani-ferry december 2012 68Source: Vasseur (2011) based on LIS data

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35

The impact of taxes and transfers (2)

0

5

10

15

20

25

30

35

40

45

50

Sweden France UK

Impact of taxes and

transfers

Gini (disposable income)

pisani-ferry december 2012 69Source: Vasseur (2011) based on Eurostat data

Impact of the income tax (2009)*

pisani-ferry december 2012*IR et PPESource: Fribourg (2011)

70

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36

Impact of tax rates, exemptions and

deductions (2009)

pisani-ferry december 2012 71Source: Fribourg (2011)

Social security contributions have been

made more progressive

pisani-ferry december 2012 72Source: Conseil des prélèvements obligatoires (2011)

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37

Income tax rates have been reduced


Note: Effet de la

suppression de

l’abattement de

20%

Source: Conseil des prélèvements obligatoires (2011)

The income tax has become sowewhat

less progressive


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38

Still high marginal tax rates towards the

bottom of the distribution (2010)

pisani-ferry december 2012 75Source: Fribourg (2011)

Indirect taxes remain regressive


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39

Benefits have a strong redistributive

effect on the first two deciles..


..but less so if tax incidence is taken

into account


09/12/2012

40

Summing up: Marginal and average tax

rates


Summing up: The impact of taxes and

benefits


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