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Published: 2022-02-17

Designing the tax system in the best possible way

PROFILE How should we design tax and transfer systems in order to reach economic policy goals in the most efficient way? How should the resources be allocated based on these objectives? Thomas Aronsson, Professor of Economics at Umeå University, examines these questions, which all politicians in the world are wrestling with.

Text: Elin Andersson

The "theory of optimal taxation" examines how the tax and transfer systems should be designed in order to reach a number of objectives, such as distributional objectives or revenue objectives, in the most efficient way. This challenge may also include influencing people's behavior and the functioning of markets. Thomas Aronsson, Professor of Economics at Umeå School of Business, Economics and Statistics (USBE), has for many years studied the trade-offs that must be made when designing the tax system.

It is desirable that those who are able to earn high incomes also choose to do so. In this way, they can contribute more to tax revenues and thus to the funds available for redistribution.

– One challenge is that the tax system affects people's behavior and thus their incomes. It is therefore important to design the tax system such that people's choices and behavior are not influenced in a way that runs counter to the objectives of the tax and transfer systems. It is desirable that those who are able to earn high incomes also choose to do so, for example through educational and labor market choices. In this way, they can contribute more to tax revenues and thus to the funds available for redistribution. Part of my research has been to study this balancing act. 

Another important challenge is so-called market failures.

– In the case of a market failure, the market does not function properly, and these problems can sometimes be counteracted through the tax system. An example of market failure is when people directly affect the welfare of others through their actions. For example, consumption of an environmentally hazardous product can lead to environmental degradation which in turn negatively affects others. A similar problem arises when the consumption of status goods (so called “conspicuous consumption”) leads to a loss of well-being for other people. In my research, I examine how the tax system can be used to counteract the negative effects of market failures.

We have been able to create a successful research environment in economics at Umeå University, and I think this is very much due to a culture of openness, constructive discussions, and good seminar activities.

Reaching the world from Umeå

Thomas Aronsson received his PhD in economics from Umeå University in 1990 and has continued his research at Umeå University since then.

– Research is my great interest, it's as much fun today as it was 30 years ago. We have a good research environment in economics at Umeå University. In addition, I collaborate with colleagues in other countries and at other universities, so I don't miss impressions from other research environments. I have also been lucky enough to be a visiting researcher at several universities abroad: University College London, the University of Wisconsin-Madison and Otto von Guericke University Magdeburg. We have been able to create a successful research environment in economics at Umeå University, and I think this is very much due to a culture of openness, constructive discussions, and good seminar activities. This makes many people want to stay at the unit.

Research must take time

Despite the fact that his research touches on topics that are highly political, Thomas Aronsson does not find it difficult to distinguish between the role of the researcher and the politician.

– Social science has a clear link to politics, of course. But our mission as researchers is to conduct research using scientific methods. Moreover, the articles we publish have undergone a professional review process. This is quite different from political work. I can see that my research has had a scientific impact, but whether it has also influenced economic policy is harder for me to judge. I believe that economics research in general has had a major impact on economic policy, but here I mean the effort of the entire research community and over a longer period of time. It may also be a good thing that research does not directly influence policy. Research is a process that must be allowed to take time and to be scrutinized and tested. 

It is the doctoral student who will be doing the research, and good research comes from the student's own interests and driving forces. That's why you have to capture the doctoral student's own interests and curiosity.

Responsiveness as a supervisor

Over the years, Thomas Aronsson has been the main supervisor of nineteen PhD students and co-supervisor of seven. All of them have defended their theses successfully.

– As a supervisor, I think it is very important to be responsive. After all, it is the doctoral student who will be doing the research, and good research comes from the student's own interests and driving forces. That's why you have to capture the doctoral student's own interests and curiosity. Then, of course, you have to take your task seriously - take your time and read their work carefully, ask questions, and discuss. A well-functioning doctoral program is also crucial for a successful research environment.