Three Essays on Optimal Policy

Abstract

This dissertation is comprised of three chapters that explore optimal policy.

Charper 1: Most energy production activities are subsidized despite generating negative externalities. We explain this phenomenon by developing a model that generalizes previous work on second-best Pigouvian taxation. In this model the policymaker will optimally subsidize a harmful production activity if a constraint or cost prevents the first-best correction of an even more harmful alternative. We highlight three examples. First, it may be optimal to subsidize a harmful activity if a political constraint prevents the taxation of an even more harmful substitute. Second, it may be optimal to subsidize a harmful activity if there is a large administrative cost associated with taxing an even more harmful substitute. Third, it may be optimal to subsidize a harmful production process if the activity mix at lower levels of output uses more harmful activities than the activity mix at higher levels of output.

Chapter 2: This chapter characterizes optimal criminal punishments when there are multiple interrelated crimes. Optimal punishments are functions of the extent to which related crimes are complements or substitutes weighted by their relative harms to society. The available empirical evidence on the relationship between index crimes in the United States suggests that tailoring criminal punishments properly to incorporate relationships between crimes could reduce the aggregate harm to victims by 3%, or about $8 billion dollars annually, holding enforcement expenditures fixed. The actual harm reduction of a marginal increase in arrests for an index crime is on average about 1.5-3 times greater than the harm reduction calculated without these effects.

Chapter 3: Under Internal Revenue Code, Section 6103, most of the information contained in corporate tax returns is not publicly available. This chapter investigates what corporations would do if they had access to other corporations’ returns, what investors would do if they had access to corporate returns, and ultimately how these behavioral responses would affect welfare. The analysis suggests that corporate tax preparation and sheltering technology would become more widely available as firms learned from each other’s returns. This would shift investment away from firms that have relatively good tax preparation and sheltering technology and toward firms that are relatively more productive. Socially wasteful expenditure aimed at lowering effective tax rates would also fall. Tax rates would likely need to rise in order to maintain government revenue, but the increase in productivity and decrease in socially wasteful expenditure would be welfare improving. The additional information that investors would gain would improve investors’ estimates of the returns and risks of investing in each corporation, which would also be welfare-improving.