We consider the issue of steady-state optimal factor taxation in a Ramseytype dynamic general equilibrium setting with two distinct distortions: i) taxes on capital and labour are the only available tax instruments for raising revenues, and ii) labour markets are subject to a static ineciency resulting from wage bargaining. If considered in isolation, under broad assumptions the two distortions create con#icting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero-capital tax result in general is no longer valid under imperfectly competitive labour markets.

For many kinds of capital, depreciation rates change systematically with the age of the capital. Consider an example that captures essential aspects of human capital, both regarding its accumulation and its depreciation: a worker obtains knowledge in period 0, then uses this knowledge in production in periods 1 and 2, and thereafter retires. Here, depreciation accelerates: it occurs at a 100 % rate after period 2, and at a lower (perhaps zero) rate before that. The present paper analyzes the implications of non-constant depreciation rates for the optimal timing of taxes on capital income. The main finding is that under natural assumptions, the path of tax rates over time must be oscillatory. Oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital (as in the above example), and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital.

Regulation is pervasive in modern societies. However, well targeted and designed regulation can generate significant benefits – delivering economic, social and environmental outcomes that may not have been achieved through a laissezfaire system. However, unnecessary or poorly formulated and implemented regulation can expose business to excessive compliance costs, stifle market competition and distort resource allocation in the economy. To ensure that regulation delivers the greatest net benefit to the economy, it needs to be properly justified and well designed, to avoid imposing unnecessary compliance costs. Significant productivity gains have been made since the 1980s from regulatory reforms, directed at: This is the second in a series of four ACCI Review articles on Australia’s productivity challenge. After a robust productivity performance during the 1990s, in particular between 1993-94 and 1998-99 where productivity growth was stronger than any comparable period in the previous three decades, Australia’s productivity growth has fallen below its long-term average since the beginning of the millennium. Given the importance of productivity growth in ensuring the sustainability of Australian economic growth and long term prosperity, this article discusses how policy reforms in the following areas can help address the national productivity challenge: regulatory policy; taxation; competition and trade openness; technological advancement, innovation and R&D; and infrastructure investment sharpening incentives to be more productive through increasing competition from domestic and overseas sources; opening the domestic economy to trade, investment and technologies from overseas; and providing greater flexibility e.g. more flexible labour markets to adjust production processes and business operations to improve productive capabilities. These reforms included deregulation of access to finance, floating the currency, establishing the independence of the Reserve Bank of Australia, marked reductions in trade barriers and restrictions on foreign direct investment, commercialisation and privatisation of government business enterprises, and increasing labour market flexibility (Parham,

Growth-inequality relationship is reexamined in a neo-classical growth model with discrete occupational choice and incomplete markets for human capital. In our model a fiscal redistributive tax program directly impacts the steady state distribution of human capital by influencing the occupational choice of the agents. Growth and incomeinequality are endogenously driven by the evolution of the proportion of innovators in the economy and the redistributive tax rate. The correlation between growth and factor shares depends crucially on the interaction between the redistributive tax policy and the initial distribution of human capital. The model predicts that the growth rate and incomeinequality are positively related across countries with different redistributive tax regimes. On the other hand, countries with different redistributive tax regimes as well as different initial distribution of human capital do not show any robust correlation between growth and inequality. The correlation depends on the skill intensity of the production technology and the degree of institutional barriers to knowledge diffusion. The lesson for the cross-country growth-inequality regression is that it is necessary to adequately control for the differences in initial distribution of human capital, and technology, as well as differences in redistributive tax regimes.

This paper re-examines recent empirical evidence that positive technology shocks lead to shortrun declines in hours. Building on Galí’s (1999) work, which uses long-run restrictions to identify technology shocks, we analyze whether the identified shocks can be plausibly interpreted as technology shocks. We first examine the validity of the identification assumption in a DGE model with several possible sources of permanent shocks. We then empirically assess the plausibility of the shocks using a variety of tests. After finding that the shocks pass all of the tests, we present two examples of modified DGE models that match the facts.

In constitutional democracies, laws take time to deliberate on, to pass and to implement. Motivated by this observation, we study the properties of optimal tax reform when it has to be announced in advance of its implementation. We find that a delay between announcement and implementation has large effects on the optimal fiscal policy during the transition to the new steady state. On the other hand, we find that the welfare gains from optimal tax reform are fairly robust to the introduction of an implementation lag. Increasing the lag from 0 to 4 years reduces the welfare gains by less than a quarter. Moreover, it turns out that this reduction of the welfare gain is mainly due to the delay itself rather than the effect of pre–announcement on the character of the optimal tax reform.

Capital taxation which is negatively correlated with labor supply is proposed. This paper uses a life-cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would work less. The system also adds to the saving motive of prime-age households and raises aggregate capital. The increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate. The negative cross dependence generates a sizeable welfare gain in the long-run relative to the tax system that treats labor and capital income separately as a tax base. The reform, however, can hurt the elderly during the transition with a high marginal tax on their capital income.

www.elsevier.com/locate/jedc Business risk, credit constraints, and corporate taxation $