Essays in Public Finance.
thesis consists of four independent essays grouped in two parts. The
first part analyzes the possibility and duration of a Pareto-improving
pension reform. The second part considers some economic issues related
to the tax avoidance activities.
The possibility and duration of a Pareto-improving pension reform.
Many countries face large problems in supporting current pay-as-you-go
pension systems arising from demographic changes leading to the
situation when returns on capital exceed population growth. Inefficiency
arises from implicit taxation on pension contributions. In a closed
economy, it is even more destructive due to its negative impact on
savings and capital accumulation. Although the transition to a fully
funded system is a great improvement of the economy, its implementation
entails several difficulties if Pareto-efficiency is required.
first essay, “The Possibility of a Pareto Improving Pension Reform
in a Heterogeneous Economy”, demonstrates that Pareto-improving
transitions from pay-as-you-go to fully funded pension systems nearly
always exist. To demonstrate this, I classify existing theoretical
results according to the type of reformed economy, the form of pension
benefits, and the policy instruments used during the transition. Then, I
show that intergenerational heterogeneity should no longer be considered
as an obstacle when implementing Pareto-improving pension reforms. To
maintain redistributive or insurance mechanisms supported by
pay-as-you-go systems, I propose to replace inefficient social security
with redistributive tax and transfer payments inside one generation.
This would save the economy from the inefficiency related to the
implicit taxes on pension contributions imposed by pay-as-you-go
second essay, “Designing Optimal Pareto Improving Pension Reforms:
A More Distorted Economy Can be Reformed Faster”, investigates the
optimal Pareto-improving debt-financed transition from pay-as-you-go to
fully funded pension systems. In particular, I examine the relationship
between key parameter values characterizing the preferences, the
technology and the size of the initial system, and the necessary time
for a Pareto-improving transition. My finding is that a more distorted
economy can be reformed faster. This result gives an additional
explanation to the success of the Chilean reform, where an initial
pay-as-you-go system was the largest and, at the same time, the most
An Economy with Clever Tax Avoidance Providers.
In the third essay “The Importance of Income Distribution for
the Price of the Tax Avoidance Service”, I design a model with a
clever tax avoidance provider, who maximizes a profit by setting the
price for the tax avoidance services. Therefore, the price for the tax
avoidance service is endogenously defined. In that setup, the change in
income distribution is not less important than changes in the tax code,
which together are responsible for the tax avoidance demand. The model
has a wide range of applications. In particular, I analyze the relation
between inequality and the collection of tax revenue. The paper shows
that tax revenue as a percentage of GDP might grow with inequality when
the tax code is not significantly changed. Moreover, higher inequality
implies lower marginal cost of additional revenue. This assay also
considers tax base broadening, providing examples where this leads to a
reduction in tax revenue.
the fourth essay, “Tax Avoidance as a Reason for Secession”, I
provide an additional explanation for the intentions to secede related to
expected changes in the tax codes after the ''break down of a nation''. To
demonstrate my points, I use a tax avoidance model designed in the third
essay, where active tax avoidance providers make a decision about the
price and quantity of their services. Secession gives the avoidance
provider the option of setting different prices in separate regions.
As a consequence, the price for the tax avoidance service may fall
in the poorer region and the elite of this region would be able to avoid
the tax, which is impossible in union. Moreover, regional separation may
lead to tremendous changes in the shape of income distribution, forcing
new governments to change the tax codes. Thus, the government of the
richer region may reduce tax rates in order to enlarge the tax revenue
collection. To avoid a breakdown of the state, the government should
reduce inefficient spending and tax duties. Promoting democracy or
increasing the political influence of poor households may reduce the
tendency to separate.
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