David Gamage

(1) A Framework for Analyzing the
Optimal Choice of Tax Instruments
(2) Analyzing the Optimal Choice of
Tax Instruments: The Case for Levying
(all of) Labor-Income Taxes, ValueAdded Taxes, Capital-income Taxes,
and Wealth Taxes
David Gamage
Assistant Professor, UC Berkeley School of Law
Question: What policy instruments should governments use to
raise revenues or to promote distribution?
-E.g., labor-income tax, excise taxes, value-added tax, capitalincome tax, wealth tax, adjusting legal rules to promote
distribution
-Standard approach in the economics-oriented legal literature is to
analyze based on implications for labor-to-leisure distortions,
saving-to-spending distortions, and (sometimes) a discrete handful
of other distortions.
-Standard approach builds on the Atkinson-Stiglitz model and
related literature.
-Then, typical to hand wave about the importance of
“implementation” and “administration” concerns, but usually
without any analysis of the tradeoffs associated with these
concerns.
-However, especially for high-income taxpayers, I read
the available empirical evidence as strongly suggesting
that the most important efficiency costs arise from a
variety of tax-gaming responses that exploit the
idiosyncratic design of tax systems and also
administrative and compliance costs.
-Can we design a framework based on the factors that
the empirical evidence suggests are most important?
-My goal in this project is to design a framework for
analyzing the implications of tax-gaming responses and
administrative and compliance costs for optimal choice
of tax instruments questions.
Figure 1
Marginal Cost of
Tax-Reduction
Behaviors
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Amount of Taxable Activity
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Figure 2
Marginal Cost of
Tax-Reduction
Behaviors
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DWL1
T2
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Amount of Taxable Activity
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Terminology
-“single-instrument distortions” are when tax-induced
behavioral responses are a direct function of the rate of only
a single tax instrument. (E.g., inflating income tax
deductions).
-“multi-instrument distortions” are when tax-induced
behavioral responses are a direct function of the rate of only
a single tax instrument. (E.g., labor-to-leisure responses,
under certain assumptions)
-“overhead costs” are when efficiency costs are not a direct
function of the tax rates, such as the fixed cost component of
administrative and compliance costs.
-also, “instrument-shifting distortions”.
Implications
-To the extent that a tax instrument induces singleinstrument responses as compared to a potential
supplementary tax instrument, this places weight toward
raising some share of revenues through the
supplementary tax instrument.
-But, levying multiple tax instruments may increase
administrative and compliance costs (“overhead costs”).
Application: Supplementing an Income Tax with a Luxury
Excise Tax
-Especially for high-income taxpayers, there is strong reason to
infer that a substantial portion of the responsiveness to real-world
labor-income taxes constitutes single-instrument distortions as
compared to luxury-excise taxes, and vice versa.
-Thus, supplementing a labor-income tax with a luxury excise tax
should reduce distortionary costs.
-However, doing so is likely to increase administrative and
compliance costs.
-The question then becomes a comparison of the potential for
decreasing distortionary costs to the increase in administrative and
compliance costs.

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