Taxation, Political Economy, and Misallocation
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Marcus Berliant, Washington University-St. Louis
Does the Cream Always Rise to the Top? The Misallocation of Talent in Innovation
AbstractThe misallocation of talent between routine production versus innovation activities is shown to have a first-order impact on the welfare and growth prospects of an economy. Surname level empirical analysis combining patent and inventor micro-data with census data reveals new stylized facts: (1) People from richer backgrounds are more likely to become inventors; but those from more educated backgrounds are not. (2) People from more educated backgrounds become more prolific inventors; but those from richer backgrounds exhibit no such aptitude. Motivated by this discrepancy, a heterogeneous agents model with production and innovation sectors is developed. Individuals compete against each other for scarce inventor training in a tournament setting. Those from richer families can become inventors even if they are of mediocre talent by excessive spending on credentialing. This is individually rational but socially inefficient. The model is calibrated to match the new stylized facts via indirect inference. A thought experiment in which the credentialing spending channel is shut down reveals that the rate of innovation can be increased by 10% of its value. Optimal progressive bequest taxes serve to increase social welfare by 6.20% in consumption equivalent terms.
Modeling Wealth and Income Inequality: Implications for Optimal Taxation
AbstractIn this paper we investigate to which extent different theories regarding the sources of income and wealth inequality have different implications for optimal income and capital taxation. In a model economy where individuals are heterogeneous in terms of both permanent and stochastic time-varying labor productivity over the life-cycle, and can only partially insure income risk, we study the welfare effects of taxes on labor and capital earnings. In contrast to recent studies, we study the effects of the entire distribution of taxes along the cross-section of earnings and wealth, not only the top income or wealth brackets. Starting from the benchmark model calibrated to the US economy, we generate increases in income inequality as the ones observed during the last three decades in the United States, by increasing the risky component of productivity over the life-cycle or alternatively by increasing the dispersion of permanent productivity levels in the population. We then ask what are the effects of changes in level and progressivity of labor income taxes, and in capital income taxes, on welfare. Preliminary results show that the predominance of permanent versus temporary components in the observed dispersion in income has important - in some instances opposing - quantitative effects on optimal tax prescriptions.
Early Childhood Investment and Income Taxation
AbstractWe study the impact of taxation on parental investment for children and its consequence on
intergenerational income correlation. We estimate a life-cycle dynastic model of households
and decompose the correlations in earnings across generations. We find that the existence of
taxes slightly reduces the correlation compared to a no tax environment. However, the family
size and the progressivity rate of the tax code significantly reduce the correlation. The
progressivity rate of the tax code, in particular, increases income mobility across generations
due to the higher fertility rate (quantity) and lower educational outcome of children (quality). The
progressive taxes reduces the value of females’ labor which reduces households’ life cycle utility.
In response to this reduction, households generate more children to increase the dynastic
component of the utility, though per child utility is lower due to the lower educational outcome of
On the Political Economy of Income Taxation
AbstractThe literatures dealing with voting, optimal income taxation, implementation, and pure public goods are integrated here to address the problem of voting over income taxes and public goods. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
- H2 - Taxation, Subsidies, and Revenue
- H0 - General