Optimal Redistributive Income Taxation and Efficiency Wages*

In this paper, we integrate efficiency wage setting with the theory of optimal redistributive income taxation. In doing so, we use a model with two skill types, where efficiency wage setting characterizes the labor market faced by the low‐skilled, whereas the high‐skilled face a conventional, competitive labor market. We show that the marginal income tax implemented for the high‐skilled is negative under plausible assumptions. The marginal income tax facing the low‐skilled can be either positive or negative, in general. An increase in unemployment benefits contributes to a relaxation of the binding self‐selection constraint, which makes this instrument particularly useful from the perspective of redistribution.     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.     

Redistribution and entrepreneurship with Schumpeterian growth

We examine the effects of redistributive taxation on growth and inequality in a Schumpeterian model with risk-averse agents. There are skilled and unskilled workers, and the growth rate is determined by the occupational choice of skilled agents between entrepreneurship and employment. We show that redistribution provides insurance to entrepreneurs and increases the growth rate. The effects on inequality are such that low tax rates increase inequality relative to laissez-faire due to changes in wages, but higher tax rates can simultaneously raise growth and reduce inequality. We contrast the optimal linear income tax with alternative policies for promoting R&D and find that it is preferable on both equity and efficiency grounds.      

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

Don't shoot yourself in the foot! A (real-effort task) experiment on income redistribution and voting

This paper reports results from a laboratory experiment that investigates the Meltzer–Richard model of equilibrium tax rates in which individuals are either low or high skilled workers and face a real-effort task that includes leisure at the work place. We find that a large proportion of low-skilled workers vote for the lowest tax rate (the one that gives them the lowest payoff), especially when the alternative tax rate is very high. However, this proportion is significantly reduced in treatments in which the subjects are given extra information about how the tax operates in redistributing income. This result suggests that the lack of information about the role of taxes in income redistribution may be an important factor in explaining the counter-intuitive voting behavior of low-income voters over income redistribution. We also find some support that the prospect of upward mobility and the belief in the negative effect of taxes on productivity make low-income voters support low tax rates, especially when the alternative tax rate is very high.     

Does the Progressivity of Income Taxes Matter for Human Capital and Growth?

We develop a model with heterogeneity in skills to study the effect of tax progressivity on economic growth. The probability of becoming skilled depends positively on expenses on teacher time. We consider growth resulting from an externality due to skilled workers and from their employment in research and development. We show changes in the progressivity of taxes can have growth effects even when changes in flat rate taxes have none. The response is stronger with externality‐driven growth. Progressive taxation, often suggested to reduce inequality, can increase the long‐run skill premium and decrease the upward mobility of the poor.     

Redistributing Gains from Globalisation*

This paper analyses the effects of redistribution in a model of international trade with heterogeneous firms in which a fair‐wage effort mechanism leads to firm‐specific wage payments and involuntary unemployment. The redistribution scheme is financed by profit taxes and gives the same absolute lump‐sum transfer to all workers. International trade increases aggregate income and income inequality, ceteris paribus. If, however, trade is accompanied by a suitably chosen increase in the profit tax rate, it is possible to achieve higher aggregate income and a more equal income distribution than in autarky, provided that the share of exporters is sufficiently high.     

Viewpoint: Innovations in the theory and practice of redistribution policy

Abstract We present a survey of key results from second‐best optimal redistribution theory and their implications for tax‐transfer policy. The core results include the Corlett‐Hague theorem, the Deaton conditions, the production‐efficiency theorem, the Atkinson‐Stiglitz theorem, and the Mirrlees‐Saez characterization of the optimal non‐linear income tax system. These have been augmented in recent years by optimal participation tax rates, the implications of involuntary unemployment, the use of unconventional instruments, such as minimum wages, in‐kind transfer, and workfare, and the optimal taxation of capital income and bequests.     

Fiscal Equalization and Tax Enforcement

In many countries organized as federations, fiscal equalization schemes have been implemented to mitigate vertical or horizontal imbalances. Such schemes usually imply that the member states of the federation can only partly internalize (marginal) tax revenue before redistribution. Aside from the internalized marginal revenue, referred to as the marginal tax‐back rate, the remainder is redistributed. We investigate the extent to which state‐level authorities in such federation under‐exploit their tax bases. By means of a stylized model, we show that the member states have an incentive to align the effective tax rates on their residents with the level of the marginal tax‐back rate. We empirically test the model using state‐level and micro‐level taxpayer data, OLS regressions and natural experiments. Our empirical findings support the results from our theoretical model. Particularly, we find that states with a higher marginal tax‐back rate exploit the tax base to a higher extent.     

THE INCOME REDISTRIBUTION EFFECT OF CHINA'S PERSONAL INCOME TAX: WHAT THE MICRO‐DATA SAY

This article uses continuous micro‐level data to investigate the income redistribution effect of the personal income tax (PIT) in China beginning in 1997. We find that the average tax rate plays a larger role in determining the income redistribution effect of PIT than tax progressivity does. Although tax progressivity decreased as a result of rising personal incomes and a constant PIT policy prior to 2005, the income redistribution effect of the PIT improved as a result of the higher average tax rate. The tax reform beginning in 2006 increased tax progressivity while decreasing the average tax rate, thereby weakening the income redistribution effect of the PIT. Further analysis indicates that the middle‐income group was the only net loser before 2005, but it benefited from the PIT policy reform. A cross‐country comparison shows that China has a lower PIT burden and higher progressivity than developed countries; in fact, China's levels of progressivity and tax burden are similar to those of Latin American countries. (JEL H24, D31, H31)     

Absenteeism,Efficiency Wages,and Marginal Taxes

In this paper, I test the argument that increased taxes on earnings correspond to increased incentives to shirk, thus causing an increase in the rate of worker absenteeism. After fixed job effects are taken into account, panel register data on prime‐age Norwegian males who work full‐time show that a higher marginal net‐of‐earnings‐tax rate reduces the rate of absenteeism. When the net‐of‐tax rate is increased by 1.0 percent, absenteeism decreases by 0.3?0.5 percent. Injury‐related absences are less affected by tax changes than other absences. Absenteeism becomes more sensitive to tax changes as the occupational unemployment rate increases.     

Fairness in tax compliance: A political competition model

This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two‐stage model where there is a two‐party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle‐income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.     

Immigration, Unemployment and Pensions

This paper examines the impact of immigration on a host country with welfare state arrangements that support both the unemployed and the elderly. It is shown that low‐skilled immigration increases the unemployment rate. Furthermore, it harms the low‐skilled native population and benefits the high‐skilled natives and pensioners. Nevertheless, as under competitive labor markets, immigration generates an unambiguous gain for the native population as a whole. However, in contrast to the findings under full employment, this gain can be dampened by an expansion of the pension system.     

Environmental Protection in the Presence of Unemployment and Common Resources

This paper examines the effects of an export tax (on a processed resource good), the number of harvesters and an afforestation policy in a small, open economy with urban unemployment. The export tax increases the urban unemployment rate, but improves the quality of the environment. Here, the optimal export tax is lower than the adjusted marginal environmental damage. Reducing the number of harvesters has a similar resource allocation effect to that of an export tax. However, the afforestation policy can resolve the trade‐off between urban unemployment and the quality of the environment and may also improve the welfare of a country.     

RATE‐CUTTING TAX REFORMS AND CORPORATE TAX COMPETITION IN EUROPE

While there is a large and growing number of studies on the determinants of corporate tax rates, the literature has so far ignored the fact that the behavior of governments in setting tax rates is often best described as a discrete choice decision problem. We set up an empirical model that relates a government's decision whether to cut its corporate tax rate to the country's own inherited tax and taxes in neighboring countries. Using comprehensive data on corporate tax reforms in Europe since 1980, we find evidence suggesting that the position in terms of the tax burden imposed on corporate income relative to geographical neighbors strongly affects the probability of rate‐cutting tax reforms. Countries are particularly likely to cut their statutory tax rate if the inherited tax is high and if they are exposed to low‐tax neighbors.     

The Optimal Environmental Tax and Urban Unemployment in an Open Economy

This paper investigates how a rise in the urban pollution tax rate may affect urban unemployment and welfare in a small open Harris–Todaro (HT) model with intersectoral capital mobility. First, by formulating urban pollution as a dirty input in manufacturing, we find that an increase in the urban pollution tax rate can increase the level of urban unemployment even with intersectoral capital mobility. That is, the optimistic finding by Rapanos (2007 ) that environmental protection policy reduces urban unemployment in the long run does not always hold. Second, the (sub)optimal pollution tax rate under urban unemployment is higher than the Pigouvian tax rate (the marginal damage of pollution). This result opposes those of Beladi and Chao (2006 ) for a closed HT economy and that of Tsakiris et al. (2008 ) for an open HT economy with sector‐specific capital.     

Income Taxation and the Diversity of Consumer Goods: A Political Economy Approach*

After‐tax income inequality has risen since the mid‐1990s, as increases in market income inequality have not been offset by greater fiscal redistribution. We argue that the substantial increase in the diversity of consumer goods has mitigated mounting political pressures for redistribution. Within a probabilistic voting framework, we demonstrate that if the share of diversified goods in the consumption bundle increases sufficiently with income, then an increase in goods diversity can reduce the political equilibrium tax rate. Focusing on OECD countries, we find empirical support for both the model's micro‐political foundations and the implied relation between goods diversity and fiscal policy outcomes.     

Minimum wage or negative income tax: why skilled workers may favor wage rigidities

In this article, we analyze the political choice of the extent and means of income redistribution between high and low-skilled workers. Redistributive tools encompass both fiscal transfers (a negative income tax) and a minimum wage requirement. We assume the use of fiscal instruments alone to be the first-best means of redistribution. We show that high-skilled workers may favor a second-best, minimum wage requirement because it increases unemployment, hence raising the marginal cost of redistribution, and creates a justification for them to moderate low-skilled workers’ claim for redistribution.      

Unobserved Heterogeneity,Exit Rates,and Re‐Employment Wages

Exit rates from unemployment and re‐employment wages decline over a period of unemployment, after controlling for worker observable characteristics. We study the role of unobserved heterogeneity in an economy with asymmetric information and directed search. We show that the unique equilibrium is separating and that skilled workers have more job opportunities and higher wages. The composition of the unemployed varies with the duration of unemployment, so average exit rates and wages fall with time. The separating equilibrium relies on performance‐related pay schemes and the ability of firms to commit to renting an input that is complementary to worker skills.     

Unemployment of Skilled and Unskilled Labor in an Open Economy: International Trade,Migration, and Outsourcing

We show how international trade, migration, and outsourcing affect unemployment of skilled and unskilled labor, in a framework that integrates the Heckscher–Ohlin model of trade with the Shapiro–Stiglitz model of unemployment. Our approach allows us to analyze changes in not only aggregate unemployment, but also the distribution of unemployment between skilled and unskilled labor. As the analysis demonstrates, the unemployment rates of these two types of labor often move in opposite directions, thereby dampening the change in aggregate unemployment. Results depend on the source of comparative advantage, based on international differences in (for example) unemployment insurance or production technology.