Essays on taxation and financial intermediation

These essays attempt to connect two strands of economic theory that have rarely met, the theory of optimal taxation and the theory of financial intermediation, with a particular focus on the taxation of intermediaries. The first chapter examines the rationale, scope for and impact of corrective taxation in standard theories of imperfect information in credit market. Contrary to a prevalent view, which holds that informational problems tend to lead to denial of credit to efficient projects, the most general assumptions imply that asymmetric information can result in both types of “errors of inefficiencies”, rejection of efficient projects and funding of inefficient ones. The introduction of a fully informed intermediary modifies the externalities that inefficient borrowers impose on efficient ones but does not otherwise modify the general problems of inefficiency. The choice of taxes on intermediaries that differ from either taxes on entrepreneurial rents or capital income is sensitive to the basic assumptions, unless taxation is costless, in which case taxation can sometimes solve the inefficiencies and dispense with the cost of intermediaries.; The second chapter examines a sequence of models of occupational choice, investment and financing. Building from a simple model, capital market imperfections due to moral hazard are first introduced. Then the model introduces a Holmstrom-Tirole bank, a monitor who must commit capital to firms that it monitors. Capital market imperfections, as well as suboptimal taxation, result in the systematic presence of multiple and generally inefficient equilibria. As a result, the theory gives ambiguous responses to questions of taxation of firms.; The third chapter starts from a different angle on the fact that taxation is costly to administer. When perfect enforcement is prohibitively costly, tax agencies and lenders may be faced with similar collection problems. A model of capital market and tax administration imperfections shows that if the evasion decisions of borrowers from either loan or tax obligations are not independent, then tax enforcement problems affect the credit market, which in turn affects tax compliance. When lenders correctly foresee the impact of weak tax enforcement on the evasion decisions of their potential borrowers, weak tax enforcement worsens the original credit market imperfections.