Optimal Taxation
Paper Session
Sunday, Jan. 7, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Ernst-Ludwig von Thadden, University of Mannheim
How to Solve a Coordination Failure: A "Super-Pigouvian" Approach
Abstract
A central concern in industrial policy discussions is that sector-specific external economies of scale may create multiple equilibria—and therefore the potential for coordination failure. Pigouvian policies that address market failures on the margin do not remove the risk of mis-coordination globally. I propose a new “super-Pigouvian” (SP) policy that retains the decentralized spirit of Pigouvian policy—regulating prices rather than quantities—but also prevents coordination failure. The main idea behind SP is to subsidize market behavior, both on and off the equilibrium path, according to the population’s willingness to pay for the welfare gains that those behaviors generate (a) directly, like Pigou, and also (b) indirectly, by affecting other households’ choices. After demonstrating SP’s welfare properties theoretically, I quantify them in a dynamic model of structural transformation calibrated to South Korea’s heavy and chemical industry drive in the 1970s. SP modestly improves welfare compared to the worst equilibrium under Pigouvian policy.Optimal Fiscal Policy under Preference Heterogeneity
Abstract
This paper studies optimal fiscal policy in a Mirrlees economy where agents are heterogeneous in their incomes, in preferences toward risk, and in the intertemporal elasticity of substitution. If low income people have both lower intertemporal elasticity of substitution and higher risk aversion, the optimal fiscal policy exhibits lower marginal tax rates and more redistribution in a recession. Marginal tax rates also decrease when government spending decreases. In the examples studied the results are purely due to the heterogeneity in preferences, that leads to differential fluctuations in the implicit Pareto weights of the agents across time and states, and in turn to fluctuations in marginal taxes and transfers.Public Debt and the Balance Sheet of the Private Sector
Abstract
The paper studies how political interests and welfare objectives influence fiscal policy and growth. We introduce different interest groups, firms and households, into a simple growth model with incomplete markets, heterogeneous agents, and non-insurable idiosyncratic productivity shocks. Firms finance productive investments by issuing bonds but cannot issue equity. Households invest in corporate and public debt. The government selects the levels of taxes and public debt so as to maximize a weighted sum of the welfare of firms' owners and households. More government debt reduces corporate leverage, increases the risk free rate r, and decreases the growth rate g. The weight of firms in social welfare determines whether rJEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H2 - Taxation, Subsidies, and Revenue