On the optimal progressivity of the income tax code

This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions.Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.     

Taxes and stabilization in contemporary macroeconomic models

The role of proportional and procyclic labor income taxes for automatic stabilization with stochastic productivity is analyzed in a contemporary macroeconomic model based on imperfect competition. The importance of short-run nominal wage rigidity for the effectiveness of progressive taxes on labor income for stabilizing output and raising household welfare is examined in a model that yields complete analytical solutions with stochastic output shocks. Increasing the procyclicity of labor income tax rates raises welfare with and without rigid nominal wages in the model economy. With fully flexible prices and wages, a positive covariance between the distortionary tax rate and productivity reduces the volatility of production and employment. This effect disappears under nominal wage rigidity, although progressive taxation can still raise welfare by reducing the distortion caused by a proportional labor tax. With rigid nominal wages and flexible consumer goods prices, payroll taxes levied at rates that rise with output can serve as automatic stabilizers. JEL Code E62 · H20     

Price Stability in Economies with Habit Persistence

This paper shows that the divine‐coincidence does not hold in a sticky price model with external habit if a time‐varying tax rate on labor income is not implemented to fully eliminate the time‐varying distortions associated with external habit and monopoly power in goods market. The required labor income tax rate is inversely related to the risk‐free real interest rate and the markup in the goods market, but it is proportional to the degree of external habit. Under this circumstance, the optimal monetary policy commands a countercyclical interest rate, having a perfect negative correlation with tax rate in the sticky price model with external habit. If a time‐invariant tax is the only fiscal instrument, then the degree of external habit entails a gap between the private marginal rate of substitution between consumption and labor and the social marginal rate of substitution, generating an endogenous trade‐off between the stabilization of welfare‐relevant output gap and inflation. Under this circumstance, price stability is not the optimal policy. The monetary policy authority should optimally try to undo the time‐varying distortions associated with external habit and monopoly power in goods market by deviating from price stability.     

新个税法模式下的劳动者权益探究

"公平"是税收环节开展与劳动关系平衡的交叉范畴,依附于人身属性以获取财产性利益的劳动者在个人所得税缴纳中占主体地位,工资薪金所得更是个人所得税的丰厚税源。新个税法由"分类税制"向"分类-综合并行二税制"模式转变,以实现对横向税负公平与纵向税负适度的保障,通过劳动性所得综合征税设置、综合所得税率调整、费用扣除标准设计三个主要方面调节劳动者权益杠杆,影射出对公民权利与义务的对等性追求。新个税改革无论在个税税制模式上抑或是税率级距设置上无不体现着对中低收入群体的福利关怀。     

Labor-dependent capital income taxation

Capital taxation which is negatively correlated with labor supply is proposed. This paper uses a life-cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would work less. The system also adds to the saving motive of prime-age households and raises aggregate capital. The increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate. The negative cross-dependence generates a sizable welfare gain in the long-run relative to the tax system that treats labor and capital income separately as a tax base. The reform, however, can hurt the elderly during the transition with a high marginal tax on their capital income.     

The Redistributive Effect of Risky Taxation

This paper examines heterogeneous effects of uncertainty of the U.S. tax policies across income classes. We construct a multi-class general equilibrium stochastic OLG model with a stochastic process of effective tax rates. In accordance with empirical evidence, the model includes two types of families: a high-income family, whose members have bequest motives and share risks; and a low-income family, whose members do not. Some notable results are as follows: (i) under a CRRA preference the efficient allocation of resources within family generates the same proportional standard deviation of consumption and leisure among family members; (ii) the welfare cost of the uncertainty of a tax policy is higher for the low-income family than for the high-income family: the cost for the low-lifetime-income family is about 145% of that for the high-lifetime-income family; Finally, (iii) the absolute level of the welfare cost for the whole population is shown to be about 0.53% of GNP, which is higher than the welfare cost measures by previous research such as Bizer and Judd (1989) and Skinner (1988).     

Is Prescott right? Welfare state policies and the incentives to work, learn, and retire

This paper bolsters Prescott’s (Fed. Reserve Bank Minneap. Q. Rev. 28(1):2–13, 2004) claim that high taxes are responsible for lackluster labor market performance in Continental European countries. We develop a life-cycle model with endogenous skill formation, endogenous labor supply, and endogenous retirement. Labor taxation distorts not only labor supply, but also education and retirement decisions. Actuarially unfair pensions further exacerbate labor tax distortions on retirement. Education subsidies can nevertheless cushion the adverse impact of taxation on skill formation. Feedbacks between education, labor supply, and retirement are important. The model is simulated with realistic behavioral elasticities that are consistent with microeconometric evidence. If, besides labor supply, also learning and retirement are endogenous, the uncompensated (compensated) elasticity of the tax base equals 0.46 (0.85), which is more than twice as large as the standard uncompensated (compensated) labor supply elasticity of 0.18 (0.40). Furthermore, life-cycle interactions between education, working, and retirement are quantitatively important and the interactions raise all behavioral elasticities substantially. For example, the uncompensated labor supply elasticity increases with one-half due to life-cycle interactions (to 0.26). We demonstrate that low European labor supply can be fully explained by taxation without relying on unrealistically high labor supply elasticities. Reducing labor market distortions, cutting benefit levels, lowering tax rates, and making (early) retirement actuarially more fair, therefore, boosts labor supply, delays retirement, and stimulates skill formation. In addition, high education subsidies are needed in large welfare states to offset explicit and implicit tax burdens on human capital investment.      

From the global income tax to the dual income tax: Recent tax reforms in the Nordic countries

The paper discusses the recent drive toward a system of dual income taxation (DIT) in the Nordic countries. The pure version of this system combines progressive taxation of labor and transfer incomes with a proportional tax on income from capital at a level equal to the corporate income tax rate. The paper considers the motives for the introduction of this new income tax system, ranging from abstract theoretical arguments to very pragmatic considerations. While the Nordic DIT system violates the principles of the conventional personal income tax, it is argued that it may in fact be more in line with the philosophy of a true Haig-Simons comprehensive income tax. It is also suggested that the DIT system may cause fewer distortions to resource allocation than the conventional income tax. On the debit side, the paper points out several practical problems of taxing income from small enterprises under the differentiated income tax.     

Monetary policy and labor market frictions: A tax interpretation

Replicating the flexible price allocation in models with nominal rigidities and labor market frictions that lead to an inefficient matching of unemployed workers with job vacancies, even if feasible, is generally not desirable. We characterize the tax instruments that implement the first best allocation and examine the trade-offs faced by monetary policy if these tax instruments are unavailable. Our tax interpretation helps explain why the welfare cost of inefficient labor market search can be large while the incentive to deviate from price stability is small. Gains from deviating from price stability are larger in economies with more volatile labor flows.     

Capital tax competition and social security

The classic capital tax policy externality is studied in the presence of a social security program where both the benefits and taxes depend on wages in an overlapping generations economy with many countries and mobile capital. We study the response and welfare implications of a coordinated capital tax rate increase across countries competing for the mobile tax base on the initial generations, the transition, and the steady state. The tax increase is initially completely capitalized, but some of the burden is shifted to labor on the transition path and in the steady state. Several new welfare effects are uncovered including an effect involving the parameters of the social security program. Sufficient conditions are provided so that all current and future generations are better off from the reform. However, social security may reduce the gain to capital tax reform.     

Revenue and welfare effects of financial sector VAT exemption

This paper provides an analysis of revenue and welfare effects associated with a VAT exemption of financial services, which is common among OECD countries. We follow a general equilibrium approach that considers effects of repealing the VAT exemption not only on consumer demand and intermediate-input demand for financial services, but takes account also of the VAT distortion of labor supply. We derive formal expressions for revenue and welfare effects, which can be quantified with a minimum of information about behavioral effects. Using VAT statistics as well as national accounts, we provide quantitative estimates of the effects of repealing the VAT exemption in Germany. Our baseline estimate indicates that tax revenues would increase by some €1.7 billion or 1.3 % of VAT revenues (excluding import turnover tax). Provided these revenue gains are used to finance a reduction in the VAT rate or in other distortive labor taxes our results indicate a modest welfare gain of about €1 billion, or 0.04 % of GDP.     

Optimal taxation with home production

Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model in which agents buy consumption goods and services and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive and the welfare gains from switching to optimal taxes are large.     

Effective labor taxation and the international location of headquarters

Profit taxes are widely acknowledged to influence the location of firms’ headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. While profit taxes can be avoided in various ways, it is much harder for firms to manipulate the firm-specific labor tax base so that labor taxes may be relatively important for firm location. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,206 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms’ decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employee- and employer-borne) social security contributions negatively influence a country’s attractiveness for headquarters location. Hence, a one percentage point increase in these payroll taxes, reduces the probability of a country to attract headquarters by 6.1 %. The results prove robust in various empirical model specifications and subsets of the data.     

Income Taxation and Finite Horizons in a Human Capital Model

We address the issue ofcapital vs. labor income taxation in an overlapping generationsmodel with a positive externality in the human capital production.We compare the performance of the economy in the steady stateunder different tax policies. Three results are obtained. First,the size of the tax revenue required strongly affects the optimal(welfare maximizing) capital-labor income tax portfolio. Inparticular, a zero physical capital income tax rate need notbe optimal. Second, the way in which the finite life cycle issplit between the working and the retirement period also matters.And third, the size of the externality in the human capital productionalso affects the optimal income tax rate mix.     

Tax Deductions and the Marginal Welfare Cost of Taxation

Recent work emphasizes the efficiency costs of tax deductions that distort the pattern of household spending. Using evidence on the sensitivity of taxable income to tax rates, this work suggests that the marginal welfare cost (MWC) of income taxes in the United States could be dramatically higher because of tax deductions, and might exceed unity. This paper develops an alternative approach for assessing the MWC using evidence on underlying parameters (e.g., labor supply elasticities, the demand elasticity for tax-favored goods). A MWC of around 0.3 to 0.5 seems more consistent with these parameter values, though this estimate is still significantly higher because of tax deductions.     

Married couple work participation and earnings elasticities: evidence from tax data

This paper uses administrative tax panel data to estimate work participation and earnings elasticities of married couples by exploiting variation in tax policy. Not only may individuals alter labor supply by working more or less in response to changes in tax policy, they may also alter reported earnings or shift income between taxable and tax-deferred compensation. As a result, in addition to estimating the standard extensive and intensive labor supply elasticities, we also examine elasticities by type of income (wage earnings vs. self-employment earnings) and compensation (taxable vs. tax-deferred). We find that wives have more elastic work participation and earnings than husbands. Furthermore, self-employment income is more responsive to net-of-tax price changes than wage earnings for both husbands and wives, suggesting that it is easier for the self-employed to alter their work hours, work intensity, and/or reported income than wage earners. Finally, we find that wives respond to changes in the net-of-tax price of earnings by altering the amount of earnings subject to current-year taxes through adjustments of tax-deferred contributions to employer-provided retirement accounts.     

MIGRATION into the WELFARE STATE: tax and migration competition

Despite big gains from easing restrictions on international labor mobility, liberalizing migration flows is not pursued unilaterally or negotiated among countries in a way that international trade negotiations are pursued. Among several key explanations is the fiscal burden imposed by immigration on native-born. The paper focuses on a central tension faced by policy makers in countries that receive migrants from lower wage countries. Such countries are typically high productivity and capital rich, and the resulting high wages attract both skilled and unskilled migrants. A generous welfare state may attract low-skill migration deter skilled migration, since it is likely to be accompanied by higher redistributive taxes. Assuming that a group of host countries faces an upward supply of immigrants, the analysis demonstrates that tax competition does not indeed lead to a race to the bottom; competition may lead to higher taxes than coordination. There exists a fiscal externality (fiscal leakage) that causes tax rates (on both labor and capital), and the volume of migration (of both skill types), to be higher in the competitive regime than in the coordinated regime.     

Fiscal policy reforms and dynamic Laffer effects

This paper looks at the conditions under which a dynamic Laffer effect occurs. Using a basic model, we explain and reconcile selected findings in the literature. We numerically show that a lower tax rate on capital income is the best candidate for obtaining a dynamic Laffer effect—here defined as an improvement in the long-run budget balance of the government. Moreover, ignoring the stock of initial debt and changes in labor supply lead to an overestimation and underestimation of the effect, respectively. Finally, we show that when lower taxes on factor income are financed by higher taxes on consumption, there exists a wide array of combinations for which there is an improvement in both the long-run government budget balance and lifetime welfare. These combinations, however, differ in their implications for labor supply and immediate welfare effects.     

美国劳动所得税抵免制度及其借鉴

美国的劳动所得税抵免制度不仅是一种税收政策,更是一种反贫困的福利政策。从效率角度看,劳动所得税抵免有助于促进低收入者参与劳动;从公平角度看,劳动所得税抵免有助于扶助低收入家庭和贫困儿童,且实施成本较低。本文通过对美国劳动所得税抵免制度的制定、实施方式、发展趋势和制度影响的分析,试图为我国的个人所得税改革寻找一种新的思路。     

Tax refunds and income manipulation: evidence from the EITC

Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the earned income tax credit (EITC) in the USA. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the USA.