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Comments on “The Efficiency of ‘Benefit-Related’ Business Taxes”

Comments on “The Efficiency of ‘Benefit-Related’ Business Taxes” By Elisabeth Gugl and George Zodrow Timothy J. Goodspeed Hunter College and Graduate Center – CUNY, CESifo. Theoretical Results. Understanding the results.

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Comments on “The Efficiency of ‘Benefit-Related’ Business Taxes”

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  1. Comments on “The Efficiency of ‘Benefit-Related’ Business Taxes” By Elisabeth Gugl and George Zodrow Timothy J. Goodspeed Hunter College and Graduate Center – CUNY, CESifo

  2. Theoretical Results

  3. Understanding the results • Modularity defines the relationship between K and B in the production function F(K, B, L). • Changing B changes: • 1. MPK by FKB • 2. F(B, K, L) by FB • If MPK/F is constant as B increases, modular • If MPK/F falls as B increases, sub-modular • If MPK/F rises as B increases, super-modular

  4. Understanding Results: Production Tax • Max (1-t)F(K,B,L) – r*K • = Max (1-t)F(K,B,L) – (1-t) FK(K,B,L)*K • Modular Case: Since MPK/F is constant as B increases, FB is offset by FKB and the effect of the tax/B on “profits” and capital flows is nil.

  5. MPK K Understanding Results: Production Tax • Sub-Modular: MPK/F falls with B so the effect FB raises MC more than FKB raises the MB for K, capital flees and underprovision of B r/(1-tFB) MB=MPK+FKB*F*(1-t) r MB=MPK K*

  6. MPK K Understanding Results: Production Tax • Super-Modular: MPK/F rises with B so the effect FB raises MC less than FKB raises the MB for K, capital flows in and overprovision of B r/(1-tFB) MB=MPK+FKB*F*(1-t) r MB=MPK K*

  7. MPK K Understanding Results: Capital Tax • Max F(K,B,L) – (r+tau)*K • Modular, Sub-Modular: MB rises by less than MC, so capital flees and underprovision • Super-Modular: MB can rise by <,=,or > MC and anything can happen r + tau MB=MPK(1+FKBK) r MB=MPK K*

  8. Comments on Simulations • 1. What do we know empirically about the modality of production functions? • The literature that came to mind on this topic is the literature concerning public capital and economic growth. • While perhaps not exactly what you are after, it seems like it comes pretty close to estimating FKB

  9. Comments on Simulations • 2. While the model does not have different industries, one wonders whether city/states with different industry characteristics (e.g. different elasticities of substitution) would fare better/worse under the two tax regimes. • 3. Or if residents differ in their labor/capital income shares, one wonders about a voting equilibrium. Maybe something to explore … sometime.

  10. Comments on Simulations • 4. Finally, the last simulations are presented with the choice of B instead of t. This reminded me of Dave Wildasin’s paper from a number of years ago that indicates that the strategic choice of spending versus taxes is not necessarily symmetric, so that is something to think about.

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