Optimal tax design attempts to resolve a well-known trade-off: namely, that high taxes are bad insofar as they discourage people from working, but good to the degree that, by redistributing wealth, they help insure people against productivity shocks. Until recently, however, economic research on this question either ignored people's uncertainty about their future productivities or imposed strong and unrealistic functional form restrictions on taxes. In response to these problems, the new dynamic public finance was developed to study the design of optimal taxes given only minimal restrictions on the set of possible tax instruments, and on the nature of shocks affecting people in the economy. In this book, Narayana Kocherlakota surveys and discusses this exciting new approach to public finance. An important book for advanced PhD courses in public finance and macroeconomics, The New Dynamic Public Finance provides a formal connection between the problem of dynamic optimal taxation and dynamic principal-agent contracting theory. This connection means that the properties of solutions to principal-agent problems can be used to determine the properties of optimal tax systems. The book shows that such optimal tax systems necessarily involve asset income taxes, which may depend in sophisticated ways on current and past labor incomes. It also addresses the implications of this new approach for qualitative properties of optimal monetary policy, optimal government debt policy, and optimal bequest taxes. In addition, the book describes computational methods for approximate calculation of optimal taxes, and discusses possible paths for future research.

Tax systems raise large amounts of revenue for funding public sector's activities, and tax/transfer policy, together with public provision of education, health care, and social services, play a crucial role in treating the symptoms and the causes of poverty. The normative analysis is crucial for tax/transfer design because it makes it possible to assess separately how changes in the redistributive criterion of the government, and changes in the size of the behavioural responses to taxes and transfers, affect the optimal tax/transfer system. Optimal tax theory provides a way of thinking rigorously about these trade-offs. Written primarily for graduate students and researchers, this volume is intended as a textbook and research monograph, connecting optimal tax theory to tax policy. It comments on some policy recommendations of the Mirrlees Review, and builds on the authors work on public economics, optimal tax theory, behavioural public economics, and income inequality. The book explains in depth the Mirrlees model and presents various extensions of it. The first set of extensions considers changing the preferences for consumption and work: behavioural-economic modifications (such as positional externalities, prospect theory, paternalism, myopic behaviour and habit formation) but also heterogeneous work preferences (besides differences in earnings ability). The second set of modifications concerns the objective of the government. The book explains the differences in optimal redistributive tax systems when governments - instead of maximising social welfare - minimise poverty or maximise social welfare based on rank order or charitable conservatism social welfare functions. The third set of extensions considers extending the Mirrlees income tax framework to allow for differential commodity taxes, capital income taxation, public goods provision, public provision of private goods, and taxation commodities that generate externalities. The fourth set of extensions considers incorporating a number of important real-word extensions such as tagging of tax schedules to certain groups of tax payers. In all extensions, the book illustrates the main mechanisms using advanced numerical simulations.

A wide-ranging survey of the theory and evidence on public goods, presenting the main literature on public goods, both theoretical and empirical, in a systematic manner. The breadth and depth of the book's coverage extends the existing literature in many ways.

Tax systems raise large amounts of revenue for funding public sector's activities, and tax/transfer policy, together with public provision of education, health care, and social services, play a crucial role in treating the symptoms and the causes of poverty. The normative analysis is crucial for tax/transfer design because it makes it possible to assess separately how changes in the redistributive criterion of the government, and changes in the size of the behavioural responses to taxes and transfers, affect the optimal tax/transfer system. Optimal tax theory provides a way of thinking rigorously about these trade-offs. Written primarily for graduate students and researchers, this volume is intended as a textbook and research monograph, connecting optimal tax theory to tax policy. It comments on some policy recommendations of the Mirrlees Review, and builds on the authors work on public economics, optimal tax theory, behavioural public economics, and income inequality. The book explains in depth the Mirrlees model and presents various extensions of it. The first set of extensions considers changing the preferences for consumption and work: behavioural-economic modifications (such as positional externalities, prospect theory, paternalism, myopic behaviour and habit formation) but also heterogeneous work preferences (besides differences in earnings ability). The second set of modifications concerns the objective of the government. The book explains the differences in optimal redistributive tax systems when governments - instead of maximising social welfare - minimise poverty or maximise social welfare based on rank order or charitable conservatism social welfare functions. The third set of extensions considers extending the Mirrlees income tax framework to allow for differential commodity taxes, capital income taxation, public goods provision, public provision of private goods, and taxation commodities that generate externalities. The fourth set of extensions considers incorporating a number of important real-word extensions such as tagging of tax schedules to certain groups of tax payers. In all extensions, the book illustrates the main mechanisms using advanced numerical simulations.

The author examines the role of optimal tax analysis in informing and influencing tax policy design.

Applied Welfare Economics uses important results in the welfare economics literature to extend a conventional Harberger cost-benefit analysis. After reviewing the properties of different welfare measures a conventional welfare equation is used to evaluate marginal policy changes in a general equilibrium economy with tax distortions. The analysis is extended to accommodate trade and income taxes, time, internationally traded goods, and non-tax distortions, including externalities, non-competitive behaviour, public goods and price quantity controls. The welfare analysis is developed in stages, and where possible is explained using diagrams, to make it more adaptable to the different institutional arrangements encountered in applied work. With this in mind, computable welfare expressions are solved using demand and supply elasticities for each good. The lump-sum transfers used in a conventional analysis to separate welfare effects are carefully examined to identify the role of the marginal social cost of public funds (MCF) in policy evaluation. The main contribution in the book is to separate income effects for marginal policy changes in the shadow value of government revenue, which converts efficiency effects into dollar changes in private surplus. It is a scaling coefficient that makes income effects irrelevant in single (aggregated) consumer economies, and conveniently isolates distributional effects in heterogeneous consumer economies. The decomposition is used to test for Pareto improvements, and to examine the separate but related roles of the shadow value of government revenue and the MCF in applied work.

This book looks at the distribution of income and wealth and the effects that this has on the macroeconomy, and vice versa. Is a more equal distribution of income beneficial or harmful for macroeconomic growth, and how does the distribution of wealth evolve in a market economy? Taking stock of results and methods developed in the context of the 1990s revival of growth theory, the authors focus on capital accumulation and long-run growth. They show how rigorous, optimization-based technical tools can be applied, beyond the representative-agent framework of analysis, to account for realistic market imperfections and for political-economic interactions. The treatment is thorough, yet accessible to students and nonspecialist economists, and it offers specialist readers a wide-ranging and innovative treatment of an increasingly important research field. The book follows a single analytical thread through a series of different growth models, allowing readers to appreciate their structure and crucial assumptions. This is particularly useful at a time when the literature on income distribution and growth has developed quickly and in several different directions, becoming difficult to overview.