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Optimal Fiscal and Monetary Policy
Friday, Jan. 7, 2022
10:00 AM - 12:00 PM (EST)
Chair: Jennifer La'O,
Taxing the Rich
Recently it has been argued that a progressive wealth tax may have large beneficial effects on the distribution of welfare in society and effectively no adverse effects on real economic activity. This paper quantitatively evaluates the merits of this view within a dynamic general equilibrium model in which wealth taxes distort the effort that managers expend and tilt their choice of projects towards less risky but also less innovative ventures. Our preliminary simulations show that even a simple version of the model accounts well for the increase in wealth inequality in the United States over the past 30 years. Such a model implies a substantial aggregate output loss from wealth taxes of the magnitude currently debated.
What are the most efficient means of redistribution in an unequal economy? We answer this question by characterizing the optimal shape of non-linear income and wealth taxes in a dynamic general equilibrium model with uninsurable idiosyncratic risk. Our analysis reproduces the distribution of income and wealth in the United States and explicitly takes into account the long-lived transition dynamics after policy reforms. We find that a uniform flat tax on capital and labor income combined with a lump-sum transfer is nearly optimal. Though allowing for increasing marginal income and wealth taxes raises welfare, the incremental gains are small due to strong behavioral and general equilibrium effects. This result is robust to changing household preferences, the distribution of ability, the planner's preference for redistribution, as well as to explicitly modeling private business ownership and the ensuing heterogeneity in rates of return.
Micro Risks and Pareto Improving Policies with Low Interest Rates
We provide sufficient conditions for the feasibility of a Pareto improving fiscal policy when the risk-free interest rate on government bonds is below the growth rate ($rg$ affects the results.
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit