Taxation and Fiscal Policy
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Sebastian Dyrda, University of Toronto
Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal?
AbstractThis paper studies optimal non-linear income taxation in an empirically plausible model with labor supply responses at the intensive (hours, effort) and extensive (participation) margins. It shows that an Earned Income Tax Credit with negative marginal taxes and negative participation taxes at the bottom is optimal if, first, social concerns for redistribution from the poor to the very poor are sufficiently weak and, second, participation elasticities are non-increasing along the income distribution. This result is driven by a previously neglected trade-off between labor supply distortions at both margins, i.e., two aspects of efficiency. Numerical simulations suggest that a large expansion of the EITC for childless workers in the US could be welfare-increasing.
On the use of Tax Perturbation Methods: A Cautionary Tale
AbstractWe study optimal income taxation in a class of static, one-dimensional Mirleesian
economies where preferences do not satisfy the Spence-Mirrlees condition
(SMC). We characterize necessary conditions for the optimal taxation using
a structural mechanism design approach based on type assignment functions.
Because the SMC is violated, local incentive constraints no longer suffice for
implementability, and an additional set of global incentive constraints must be
explicitly taken into account. When these global constraints bind, they create
a tension between infra-marginal types whose ICs are not handled by any local
approach. Local perturbations (or small reforms) of the optimal tax schedule
may have global (first-order) impacts on welfare, thus invalidating some of the
assumptions underlying local variational methods.
Optimal Taxation of Inheritance and Retirement Savings
AbstractWe study optimal inheritance tax in a model where the bequest and saving motives are driven by the differences in medical expenses, mortality risk, and patience, as well as heterogeneous productivity. We show that the correlations between these factors and the earning productivities are the key for the marginal inheritance taxation — the sign and the magnitude of the tax. Positive inheritance taxes are optimal when rich people face higher medical expenses and are more patient. In the presence of heterogeneous mortality risk, optimal taxation of inheritance and retirement savings should be designed jointly. Longer life expectancy of productive workers will increase the tax on retirement savings and decrease the tax on inherited wealth. Higher patience for more productive people could be another reason for taxing inherited wealth.
Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks
AbstractIn a standard incomplete markets model a Ramsey planner chooses time-varying
paths of proportional capital and labor income taxes, lump-sum transfers (or taxes),
and government debt. Distortive taxes reduce the variance cross-sectionally and over
time of after-tax income, improving welfare for redistributive and insurance motives,
which we quantify. Optimal capital income tax is higher than labor income tax in the
long run; it provides insurance more efficiently. The government accumulates assets
providing redistribution via general equilibrium price effects. The planner’s degree of
inequality aversion only affects policy in the short run. Ignoring transition leads to
significant welfare losses.
- H2 - Taxation, Subsidies, and Revenue
- H3 - Fiscal Policies and Behavior of Economic Agents