Efraim Sadka

• Tel Aviv University

Empirical evidence suggests that charitable contributions to public goods by businesses may be driven not only by the familiar warm glow of giving motive but also as a means for businesses to signal high product quality. Building on this finding, we present an analytical framework that demonstrates that the optimal degree of subsidization should de...

The theoretical framework behind "Effective tax rates in macroeconomics Cross-country estimates of tax rates on factor incomes and consumption" by Enrique G. Mendoza, Assaf Razin, and Linda L. Tesar. An application to inflation in Israel.

Globalization radically changes income distribution and triggers intense international tax competition. Therefore, globalization entails an extensive restructuring of the welfare state. We analyze a parsimonious model of an open economy, in its trade and finance transactions with the rest of the world, governed by voter-majority-controlled welfare...

In this paper we review of literature and offer historical, empirical and analytical explanation for the interactions between the welfare state and globalization driving forces. Globalization-a widespread contemporaneous phenomenon-generates international tax competition. The consequent erosion in the tax base, especially on capital, is another blo...

The ongoing advance of globalisation has created a genuine need for international tax reforms. This column explores potential reforms and their likely effects, using a model with flexible prices. Residence-based income taxation is shown to have welfare advantages over source-based taxation, though at the cost of a larger trade deficit. Non-transito...

We are motivated by the unique migration experience of Israel, of a supply-side shock triggering skilled immigration and the concurrent decline in welfare-state redistribution. This paper develops a model that can provide an explanation for the mechanism through which a supply-side shock, triggering high-skill migration, can also reshape the politi...

We develop a dynamic political-economic theory of welfare state and immigration policies, featuring three distinct voting groups: skilled workers, unskilled workers, and old retirees. The essence of inter- and intra-generational redistribution of a typical welfare system is captured with a proportional tax on labor income to finance a transfer in a...

We dissect welfare stigma into two types: traditional and statistical, and show that the latter can be employed as a desirable form of a welfare ordeal, as its costs are positively correlated with ability. This article is protected by copyright. All rights reserved.

Each country must decide (i) whether, and if so at what rate, to tax its citizens/ residents on their foreign-source income (e.g. wages, interests, dividends, etc.); and (ii) whether, and if so at what rate, to tax foreigners on their income originating from sources within the jurisdiction. This chapter describes the main principles of internationa...

When union member states compete with each other, they admit a higher proportion of low-skilled migrants, and provide a more generous welfare state, than when they cooperate. However, when cooperating they admit smaller actual numbers of migrants overall—both highly skilled and low-skilled—than when they compete with each other.

There is free mobility of labor goods and capital among states within a union. These states are also destination countries for migrants from the rest of the world, who are generally poorer than the native-born residents of these countries. In this chapter, we consider a competitive policy regime in which each country in the union determines its own...

We argue that the differences between the US and the EU relating to the degree of coordination among the member states and the aging of the population contribute a great deal to our understanding of observed policy differences between the two unions: the generosity of the welfare state and the skill composition of migration.

Although the population of the US is both getting older and growing more slowly than in the past, the demographic future for the US is younger than that of the core EU countries. This chapter presents a political-economy overlapping generations model which predicts the implications for aging on the generosity of the welfare state.

In the EU there is no union-wide income tax, healthcare program such as Medicare or Affordable Care in the US, or social security scheme. Social expenditures in EU core countries and the US are significantly different: They are much lower in the US than in the EU.

To address the interaction between the welfare state and the migration state in the interplay between free and controlled migration, this chapter provides a presentation of the simple analytics of free and controlled migration within the framework of a single union-member representative country.

Highly skilled immigrants are more attractive to destination countries than are low-skilled immigrants for a variety of reasons; for instance, highly skilled immigrants are expected to pay taxes in excess of the benefits provided to them.

This chapter provides evidence that the generosity of the welfare state attracts a skill composition of migrants which is tilted in the direction of highly skilled migrants when migration is controlled. When migration is free, however, the generosity of the welfare state acts as a magnet to low-skilled migrants, and as a result, the skill compositi...

The alternative to policy competition among states within a union is coordination among the union’s members with respect to the fiscal and migration policies. This institutional regime of coordination among union-member states may capture the essence of the federal system of the United States.

Net fiscal burden has been used as an indicator for the native-born income losses from low-skilled migration. But in the context of a pay-as-you-go welfare system with overlapping generations, the indicator is not correct. It does not properly predict the gains for the native- born from the support the migrants provide by increasing the workforce t...

In this paper we demonstrate that supplementing the optimal non-linear income tax system with a binding maximum wage rule attains a Pareto improvement, by serving to mitigate the mimicking incentives of the high-skill individuals without entailing distortions.

In this paper we extend the zero tax at the top result obtained in the closed economy case with bounded skill distributions for the case of unbounded skill distributions in the presence of international labor mobility and tax competition. We show that in the equilibrium for the tax competition game the optimal marginal income tax rate converges to...

In this paper, we reexamine the conventional wisdom that due to the negative correlation between family size and earning ability, family size can be used as a 'tagging' device, so that subsidizing children (via child allowances) enhances egalitarian objectives. We show that the case for subsidizing children crucially hinges on child allowances bein...

A unified formal framework for studying how social benefits-immigration conflicts are resolved in a range of policy regimes. Nobel laureate economist Milton Friedman once noted that free immigration cannot coexist with a welfare state. A welfare state with open borders might turn into a haven for poor immigrants, which would place such a fiscal bur...

This chapter focuses on studying the joint determination of redistribution and migration policies. It states that the redistribution policy needs to consider inter- and intragenerational aspects, symbolizing a complete welfare state system, and employs a two-period, overlapping-generations model to conduct investigations. The chapter focuses on sin...

This chapter investigates the politico-economic determination of the welfare state generosity, along with the volume and skill composition of migration. The investigation examines the restricted- and free-migration policies. The native population of a host country selects the volume and skill composition of migration under the politico-economic pro...

This chapter addresses the impact of benevolence of the welfare state on the skill aspect of migration. It examines the difference in policy regimes in EU and non-EU states regarding the concept of the free and restricted migration of workers. The differences in migration policies are associated with the kindness of the welfare state. The chapter s...

An old person typically has am ixed attitude towards the welfare-state beneÞts when they are Þnanced by capital taxes, because her income derives mostly from capital. We develop a simple political-economy model, which focuses on the effect of aging on this dillema. The theory predicts that tax rates on capital income could actually rise as the popu...

In this paper we demonstrate that in addition to its acknowledged screening role, workfare - namely, introducing work (or training) requirements for welfare eligibility in means-tested programs - also serves to mitigate income misreporting by welfare claimants. It achieves this goal by effectively increasing the marginal cost of earning extra incom...

In this paper we employ a tax-competition model to demonstrate that in the presence of migration the re-distributive advantage of a non-linear income tax system over a linear (flat) one is significantly mitigated relative to the autarky (no-migration) equilibrium. When migration threats are sufficiently strong, a coordinated shift from a non-linear...

Oates reminds us that tax competition among localities in the presence of capital mobility, may lead to inefficiently low tax rates (and benefits). In contrast, the Tiebout paradigm suggests that tax competition yields an efficient outcome, so that there are no gains from tax coordination. This paper demonstrates that when a group of host countries...

Over the years, there emerged two key policy differences between Europe and America, both welfare and migration-states. The former has more generous welfare state and more liberal migration policies than the latter. In this paper we attempt to provide a political-economy explanation for these key differences, based on the degree of coordination amo...

This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours an...

it is. The evidence suggests otherwise... For 160 years, best-performance life expectancy has steadily increased by a quarter of a year per annum...” 2. The median age in Europe is forecasted to rise from 37.7 now to 52.7 in 2050. The ratio of the elderly to the working-age population in West Europe is expected to double from 20 % in 2000 to 40 % i...

Abstract The existence of setup costs of foreign direct investment,must,present foreign investors with a two-fold decision: whether,to establish subsidiaries in a speci…c host country at all, and how much to invest in the subsidiary, if they decide to establish it. We estimate,in this paper a selection equation,(the decision whether to invest at al...

We model an overlapping-generations economy with two skill levels: skilled and unskilled. The welfare-state is modeled simply by a proportional tax on labor income to finance a demogrant in a balanced-budget manner. Therefore, some (the unskilled workers and old retirees) are net beneficiaries from the welfare state and others (the skilled workers)...

In this paper we challenge the conventional wisdom that using workfare as a supplementary screening device to means-testing is socially undesirable when the government objective is welfarist, namely, to ensure that all members of society will attain some minimal level of utility. Our argument suggests that when misreporting of income by welfare cla...

In his praise of the book, Jerry Green wrote: "Eytan Sheshinski has written the definitive book on the economics of annuities." Indeed, having read this book, Green's praise is a good summary of my overall impression. The analysis is self-contained and rigorous, yet crystal clear and supplemented with simple economic intuition.

In this paper, we challenge the conventional wisdom that due to the negative correlation between family size and earning ability, family size can be used as a 'tagging' device, and calls for subsidizing children (via child allowances) to enhance egalitarian objectives. We show that the case for subsidizing children crucially hinges on child allowan...

Skilled migrants typically contribute to the welfare state more than they draw in bene…ts from it. The opposite holds for unskilled mi-grants. This suggests that a host country is likely to boost (respec-tively, curtail) its welfare system when absorbing high-skill (respec-tively, low-skill) migration. In this paper we …rst examine this hypoth-esis...

In this paper, we discuss a novel aspect of affirmative action policy. We examine its redistributive role, asking whether in an egalitarian society, supplementing the tax-transfer system with an affirmative action policy would enhance social welfare. We demonstrate that affirmative action could be a desirable policy tool even if racial discriminati...

Skilled migrants typically contribute to the welfare state more than they draw in benefits from it. The opposite holds for unskilled migrants. This suggests that a host country is likely to boost (respectively, curtail) its welfare system when absorbing high-skill (respectively, low-skill) migration. In this paper we first examine this hypothesis i...

We consider the notion of welfare stigma à la Besley and Coate (1992b). This stigma is attributed to welfare claimants by society when they are perceived as undeserving in the sense that they falsely claim to be eligible for welfare benefits. However, due to imperfect information, this stigma may be extended, with some probability, to all welfare c...

We illustrate a novel informational feature of education, which the government may utilize. Discretionary decisions of individuals to acquire education may serve as an additional signal (to earned labor income) on the underlying unobserved innate earning ability, thereby mitigating the informational constraint faced by the government. We establish...

Foreign direct investment (FDI) is a form of international capital flows. It plays an important role in the general allocation of world capital across countries. It is often portrayed, together with other forms of capital flows, as shifting capital from rich, capital-abundant economies to poor, capital-scarce economies, as a means to close the gap...

We re-examine a key result in the optimal UI literature that benefits should decline over time. We show that when the population is heterogeneous, Pareto-efficiency may call for multiple payment schedules, some with benefits that fall over time and some with benefits that rise over time.

Public-private partnerships (PPPs) are spreading all over the world. It may be quite plausible that they were initially started mainly as an attempt to evade expenditure controls and hide public budget deficits. But if they are properly designed and transparently reported, PPPs can play a useful role in enhancing the efficiency of the provision of...

We develop a simple information-based model of Foreign direct investment (FDI) flows. On the one hand, the relative abundance of “intangible” capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country rela...

The paper extends the welfare state model in an earlier paper [Razin, A., Sadka, E., Swagel, P., 2002. The aging population and the size of the welfare state. Journal of Political Economy 100, 900–918.] to include also a capital tax component in the income tax which pays the social security benefits. With a full-fledged income tax, various fiscal l...

We develop a model that allows for public goods and status signaling through charitable contributions. We use this setup to re-examine the conventional practice of rendering a favorable tax treatment to charitable contributions.

We consider a model of prejudice-driven discrimination, where the advantaged ‘tall’ discriminate against the disadvantaged ‘short’. We employ an egalitarian social welfare function to compare anti-discrimination legal rules with a non-discriminatory (‘height-blind’) income tax.

We develop a model that allows for public goods and status signaling through charitable contributions. This model provides a unified framework in which contributions are driven both by altruism and status signaling. We use this setup to re-examine the conventional practice of rendering a favorable tax treatment to charitable contributions.

We develop a framework in which the host-country productivity has a positive effect on the intensive margin (the size of FDI flows), but only an ambiguous effect on the extensive margin (the likelihood of FDI flows to occur). The source-country productivity has a negative effect on the extensive margin. An increase in the host-country corporate tax...

The 1990s saw global flows of foreign direct investment increase some sevenfold, spurring economists to explore FDI from a micro- or trade-based perspective. Foreign Direct Investment is one of the first books to analyze the macroeconomics of FDI, treating FDI as a unique form of international capital flow between specific pairs of countries. By ex...

Economists tend to favor the free flow of capital across national borders, because it allows capital to seek out the highest rate of return. They also offer several other advantages . First, they reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. Second, the global integration of capital markets c...

This paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determining the volume...

Economists tend to favor the free �ow of capital across national borders, because it allows capital to seek out the highest rate of return. Unrestricted capital �ows may also o�er several advantages, as noted by Feldstein (2000). First, international �ows reduce the risk faced by owners of capital by al- lowing them to diversify their lending and i...

In this paper, we explore how the government can play a role in affecting the compensation policies of private firms in a manner that complements its income tax policies. We illustrate how this role of the government can be served by minimum wage legislation. Copyright Springer Science + Business Media, Inc. 2005

We introduce the notion of social mobility into an optimal income tax model. This is done by allowing earning abilities to be partly innate and partly acquired through investments in human capital (education). The implications for the optimal re-distributive policy are studied.

A positive productivity shock in the host country tends typically to increase the volume of the desired FDI flows to the host country, through the standard marginal profitability effect. But, at the same time, such a shock may lower the likelihood of making any new FDI flows by the source country, through a total profitability effect, derived from...

In this paper we aim to address the question of whether in a society that cares about equality both across population groups and within each population group (across skills), supplementing an optimal tax and transfer system with an affirmative action policy would enhance social welfare.

The paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determimnig the volume...

In The Decline of the Welfare State, Assaf Razin and Efraim Sadka use a political economy framework to analyze the effects of aging populations, migration, and globalization on the deteriorating system of financing welfare state benefits as we know them. Their timely analysis, supported by a unified theoretical framework and empirical findings, dem...

We consider a model of prejudice-driven discrimination, where the advantaged 'tall' discriminate against the disadvantaged 'short'. We employ an egalitarian social welfare function to compare anti-discrimination legal rules with a non-discriminatory ('height - blind') income tax.

A model with setup costs of new investment is developed and applied for the reconciliation of the Lucas question as to why capital does not fly from rich to poor counries so as to equate wages and relieve the desire of labor to migrate from poor to rich countries.

An income tax is generally levied on both labor and captal. The working young bear mostly the tax on labor income, whereas the old, who already accumulated savings, bear the brunt of the capital tax. Therefore, there arise two types of conicts in the determination of the income tax: the standard intra-generational conict between the poor and rich,...

The paper develops a model with lumpy setup costs of new investment, which govern the flows of FDI. Foreign investment decisions are two-fold: whether to export FDI and, if so, how much. The first decision is governed by total profitability considerations, whereas the second is governed by marginal profitability considerations. A positive productiv...

The paper develops a model with ¡§lumpy¡¨ setup costs, which govern the flow of bilateral foreign direct investment (FDI). Every country is potentially both a source for FDI flows to several host countries, and a host for FDI flows from several source countries. But technologically-advanced countries have a comparative advantage in setting up forei...

Migration of young workers (as distinct from retirees), even when driven in by the generosity of the welfare state, slows down the trend of increasing dependency ratio. But, even though low-skill migration improves the dependency ratio, it nevertheless burdens the welfare state. Recent studies by Smith and Edmonston (1977), and Sinn et al. (2003) c...

The behavior of taxes on capital income in the recent decades points to the notion that international tax competition that follows globalization of capital markets put strong downward pressures on the taxation of capital income; a race to the bottom. This behavior has been perhaps most pronounced in the EU-15 following the single market act of 1992...

We develop a simple information-based model of FDI flows. On the one hand, the relative abundance of “intangible" capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country relative corporate-transparency...

An old person typically has a mixed attitude toward the welfare-state benefits, when they are financed by capital taxes, because her income derives mostly from capital. We develop a majority-voting model which focuses on the effect of aging on this dilemma. Surprisingly, the theory predicts that tax rates on capital income could actually rise as th...

The paper provides a reconciliation of Lucas' paradox, based on fixed setup costs of new investments. With such costs, it does not pay a firm to make a "small" investment, even though such an investment is called for by marginal productivity conditions. Using a sample of 45 developed and developing countries we estimate jointly the participation eq...

The aging of the population shakes the public finance of pay- as-you-go social security systems. We develop a political-economy framework in which this demographic change leads to the downsizing of the social security system, and, as a consequence, to the emergence of supplemental individual retirement programs. Allowing for a one-shot budget defic...

Minimum wage legislation is a standard policy tool in most countries. However, the overall merits of minimum wage are controversial due to its potential adverse effects on unemployment. In this paper we construct a simple model in which minimum wage plays an important re-distributive role, alongside income taxation, without generating adverse effec...

This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours an...

We consider a model of prejudice-driven discrimination, where the advantaged 'tall' discriminate against the disadvantaged 'short'. We employ an egalitarian social welfare function to compare anti-discrimination legal rules with a non-discriminatory ('height-blind') income tax.

One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not cu...

This paper develops a model that captures important features of debt crises of the Brazilian type. Its applicability to Brazil lies in the facts that (1) macroeconomic fundamentals were relatively sound in the wake of the crisis (e.g., a nonnegligible primary surplus, a relatively low debt-GDP ratio, and low inflation); and (2) the trigger for the...