The Economics of Taxation, edited by James Alm

The International Library of Critical Writings in Economics 251, Edward Elgar, 2011, 2 volume set, xxxvii + 592 pp, and x + 695 pp, hbk, 1 84844 829 2, £435

The title of the series to which these volumes belong contains an important ambiguity. A critique is a careful examination of a subject, so a critical writing is a careful study of the subject under review; but in common parlance ‘critical’ also means ‘significant’. (We might say that the title of the series contains a critical ambiguity.) It is in this double sense that the writings contained in these volumes are ‘critical’. They are careful studies of aspects of taxation, and they are also significant, in relation to the study of taxation, in relation to the social policy field as a whole, and because they have been seminal in their field.

As the editor’s introduction states, taxation policy has multiple goals: adequacy (to collect enough revenue – we see the consequences of not doing so in the current plights of a number of Eurozone countries), equity, and efficiency (in the sense that taxation should interfere as little as possible with firms’ and individuals’ decisions in markets for labour and other commodities).

The papers collected in these two volumes fall into sections on the effects of taxation (equity, income distribution, efficiency, revenue collection, economic growth, and politics), optimal taxation, tax reform, individuals’ decisions (in relation to incentives, labour supply, saving, portfolio choice, capital gains, estate taxes, tax evasion, and income reporting) and business decisions (in relation to capital taxation, investment, and financial structure). Many of the papers, and the collection as a whole, offer a good balance between theory and practice. A good example of such balance is Fullerton’s paper ‘On the possibility of an inverse relationship between tax rates and government revenue’ – and it is in this paper that we find a clue to an important problem related to any attempt at a collection of papers on taxation. ‘Welfare programs that make recipients ineligible at a given income level imply effective marginal tax rates of 100 percent or higher’ (p.20 of Fullerton’s article, p.272 of volume I of the collection). For UK residents in receipt of the means-tested ‘Tax Credits’, the rate of withdrawal of the benefit is at least as important a determinant of labour market decisions as is the income tax rate. Similarly, Slemrod’s conclusions about behavioural responses to changing tax rates and changing tax avoidance possibilities apply as much to benefit rates and income non-declaration as they do to tax rates and tax avoidance. Hausmann’s paper on labour supply correctly identifies transfer payments’ effects on net income as an important factor (p.37 of his article, p.27 of volume II of the collection). All this is to say that many of the conclusions drawn in the papers are generalizable to the characteristics and effects of means-tested and other benefits, and to the combinations of benefits and taxes that many people experience. To incorporate consideration of household-based means-tested benefits into the theoretical models employed by many of the papers (and particularly in papers such as Atkinson’s and Stiglitz’s on the design of tax structures) would considerably complicate the mathematics, but it is surely essential to attempt this, which suggests that many of the papers here really are, as they themselves suggest, starting-points still awaiting further development.

It is a pity that this two volume collection contains no index. To have included one would have considerably enhanced usefulness of the set to researchers. But that is the only problem. This collection, which will be consulted mainly in libraries, will give to students of taxation a valuable source of critical writings to aid their studies. What we need now is a similar collection of papers which study tax and benefits systems together, which study their combined behavioural effects, and which discuss the policy consequences of those effects. Atkinson’s work on a flat tax and a Citizen’s Income would surely find an honoured place in such a collection.

Policy-makers need to integrate tax and benefits policies, and preferably tax and benefits. A collection on the economics of tax and benefits as good as Alm’s on the economics of taxation would be of considerable assistance.