Optimal Taxes in Atomic Congestion Games

How can we design mechanisms to promote efficient use of shared resources? Here, we answer this question in relation to the well-studied class of atomic congestion games, used to model a variety of problems, including traffic routing. Within this context, a methodology for designing tolling mechanisms that minimize the system inefficiency (price of anarchy) exploiting solely local information is so far missing in spite of the scientific interest. In this article, we resolve this problem through a tractable linear programming formulation that applies to and beyond polynomial congestion games. When specializing our approach to the polynomial case, we obtain tight values for the optimal price of anarchy and corresponding tolls, uncovering an unexpected link with load balancing games. We also derive optimal tolling mechanisms that are constant with the congestion level, generalizing the results of Caragiannis et al. [8] to polynomial congestion games and beyond. Finally, we apply our techniques to compute the efficiency of the marginal cost mechanism. Surprisingly, optimal tolling mechanism using only local information perform closely to existing mechanism that utilize global information, e.g., Bilò and Vinci [6], while the marginal cost mechanism, known to be optimal in the continuous-flow model, has lower efficiency than that encountered levying no toll. All results are tight for pure Nash equilibria and extend to coarse correlated equilibria.

Interregional Competition for Mobile Creative Capital with and Without Physical Capital Mobility

A lacuna in the extant literature and our desire to contribute to the theoretical literature on how tax/subsidy policies can be used by regions to attract the creative class together provide the motivation for this paper. The paper’s basic contribution is that it is the first to theoretically analyze competition between two regions (1 and 2) for mobile creative capital, the key attribute possessed by the creative class. Both regions produce a final good using creative and physical capital. In the first case, physical capital is immobile and only region 2 uses tax policy to attract the mobile creative capital. We compute the equilibrium returns to creative and physical capital, we specify a key condition for creative capital in the aggregate economy, and we show which of three tax policies gives region 2 the highest income. In the second case, creative and physical capital are mobile and both regions pursue tax policies to attract mobile creative capital. Once again, we compute the equilibrium returns to creative and physical capital and then describe the optimal taxes for the two regions given that they wish to maximize regional income.

On optimal taxes and subsidies: A discrete saddle-point theorem with application to job matching under constraints

When a government intervenes in markets by setting a target amount of goods/services traded, its tax/subsidy policy is optimal if it entices the market participants to obey the policy target while achieving the highest possible social welfare. For the model of job market interventions by Kojima et al. (2019), we establish the existence of optimal taxes/subsidies as well as their characterization. Our methodological contribution is to introduce a discrete version of Karush-Kuhn-Tucker's saddle-point theorem based on the techniques in discrete convex analysis. We have two main results: we (i) characterize the optimal taxes/subsidies and the corresponding equilibrium salaries as the minimizers of a Lagrange function, and (ii) prove that the function satisfies a notion of discrete convexity (called L#-convexity). These results together with others imply that an optimal tax/subsidy level exists and can be calculated via a computationally efficient algorithm.

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general‐equilibrium “trickle‐down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.

Optimal Taxation with Behavioral Agents

This paper develops a theory of optimal taxation with behavioral agents. We use a general framework that encompasses a wide range of biases such as misperceptions and internalities. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities), and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to novel economic insights. We also show how to incorporate nudges in the optimal taxation framework, and jointly characterize optimal taxes and nudges. (JEL D62, D91, H21)

Poverty and Savings: Optimal Taxes with Endogenous Discount Factors

Following recent developments linking poverty to present-bias behavior, we conduct an optimal linear taxation analysis where some individuals (called “behaviorals”) have a discount factor that is a function of their disposable income. In the model, endogenous discount factors imply (1) that taxing labor decreases the valuation of savings and (2) that subsidies on savings mitigate for a lower weight being given to future consumption. We perform simulations where the number of behavioral individuals increases and find that resources raised through labor taxation are used to finance saving subsidies rather than an increase of transfers. The prevalence of behaviorals leads to an increase in the labor income tax rate.

An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates

We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism. (JEL D31, H21, H23, H24, H26, H71, H77)