Income splitting among the self-employed

Abstract .  Under individual taxation with progressive marginal tax rates, households in which the distribution of income is unequal benefit from attributing income to the lower income household member. Self-employment provides greater potential to 'split' income in this way because of the absence of a third party reporting income. Using the Canadian experience as a case study, this paper develops a unique estimator of the incidence of illegal income splitting among self-employed couples. The results suggest that the incidence of income splitting among self-employed men in Canada is non-trivial; but no evidence is found that self-employed women attribute income to their spouses.     

Income distribution, efficiency and rationing

This paper studies the impacts of income distribution on the efficiency of trade mechanism and rationing of agents who are priced out of trade in a dynamic search model with two-sided asymmetric information. Buyers and sellers have asymmetric information about valuations and incomes respectively. In such a frictional environment, the effects of several variants of changes in income distribution on efficiency of trading mechanism and the population of rationed buyers and sellers are elaborated.     

Income distribution, borrowing constraints and redistributive policies

This paper sheds light on the relationship between income inequality and redistributive policies and provides possible guidance in the specification of empirical tests of such a relationship. We model a two-period economy where capital markets are imperfect and agents vote over the level of taxation to finance redistributive policies that enhance future productivity. In this context, we show that the pivotal voter is not necessarily the agent (class) with median income. In particular, the poor, who are more likely to be liquidity constrained, may form a coalition with the rich and vote for low redistribution. The effects of an increase in income inequality on the level of redistribution turn out to depend on whether the increase in inequality is concentrated among the poor or the middle class. Empirical results from a panel of 22 OECD countries provide preliminary evidence consistent with our main theoretical implications.     

Gender Power,Fertility, and Family Policy

The birth of children often shifts the balance of power within a family. If family decisions are made according to the welfare function of the spouses, this shift in power might cause a time‐consistency problem. In a model of cooperative family decision‐making, we show that this problem can lead to a systematic downward bias in fertility. By keeping fertility low, spouses mitigate the ex ante undesired shift in the balance of power that results from the presence of children. This provides scope for welfare‐enhancing policy intervention. We discuss to what extent existing family policy measures are suitable for overcoming the bias.     

Income comparison and happiness: The role of fair income distribution

Relative income gap is one of the most popular approaches for explaining the income–happiness relationship. We argue in this article that when people compare their incomes, they care about distributional fairness more than relative income disparity. It is difficult for us to explain China's income–happiness paradox if we simply compare the income gap and do not explore the income‐generation process leading to income inequality. We therefore employ an approach based on a responsibility‐sensitive theory of justice that decomposes individual income into fair and unfair components. As a proxy for distributional unfairness, unfair income is considered the main source of unhappiness. Using data from the Chinese Household Income Project survey, we find strong support for the negative relationship between income unfairness and happiness. We also find a significantly positive relationship between the relative income gap and income unfairness, which leads us to consider the income comparison hypothesis as the explanation for the income–happiness paradox in a new light. Sensitivity analyses confirm the robustness of our results.     

Income stratification and between-group inequality

The paper shows explicitly how the overlapping of groups impacts between-group inequality by generalizing a result on the group-wise decomposition of the Gini index to more than two groups. It is demonstrated that the ratio of Yitzhaki’s measure of between-group inequality to the conventional measure is in general equal to one minus twice the weighted average probability that a random member of a richer (on average) group is poorer than a random member of a poorer (on average) group, and may therefore be interpreted as an overall index of income stratification in the population. The results are used to tabulate the contribution of each pair of regions in the world to the overall level of global income stratification.     

The Income Splitting Method: Is it Good for Both Marriage Partners?

Abstract. This paper analyzes how deviating from individual taxation affects married couples. The focus is on time allocation, on investment in family‐specific human capital and on distribution of income within the family. Two insights are discussed in detail. First, the distribution of tax‐reduction gains due to the income splitting system depends on whether the family has been started or not. After marriage, joint taxation increases redistribution among family members. Second, although joint taxation reduces the tax burden of the family, it might harm the marriage partner that is more productive in household production provided that potential marriage partners foresee the effects of joint filing on the time allocation within the family.     

Improving Work Incentives and Incomes for Parents: The National and Geographic Impact of Liberalising the Family Tax Benefit Income Test*

The effective tax rates and possible work disincentives created by Australia’s tax and welfare systems have been receiving extensive policy attention in recent years. Family Tax Benefit‐Part A (FTB‐A) is one of the key causes of high effective marginal tax rates for many families. This study uses national and spatial microsimulation models to evaluate the national and local impacts of a possible FTB‐A reform option, which involves reducing the income test withdrawal rate associated with the FTB‐A income test. The modelling suggests that the option would be an effective way to reduce high effective marginal tax rates for around 415,000 parents of FTB‐A children, would benefit around 850,000 families, and would deliver additional assistance to middle income families living on the outskirts of our cities.     

Optimal contracting with dynastic altruism: Family size and per capita consumption

We use a Barro–Becker model of endogenous fertility, in which parents are subject to idiosyncratic shocks that are private information (either to labor productivity or taste for leisure), to study the efficient degree of consumption inequality in the long run. The planner uses the trade-off between family size and future consumption and leisure, to provide incentives for workers to reveal their shocks. We show that in this environment, the optimal dynamic contract no longer features immiseration in consumption. We also discuss the implications of the model on the long run properties of family size in the optimal contract and show that the long run trend in dynasty size can be either positive or negative depending on parameters.     

Tax incentives and fertility in Canada: quantum vs tempo effects

Abstract.  Using inter-jurisdictional differences in the implementation of the Family Allowance Program in Canada in the mid-1970s, this paper first shows that Quebec families with two or more children prior to being exposed to the program responded quite strongly to the added incentives in the short run relative to women in other Canadian provinces. Tracking down the cohorts across Censuses, we find that the same group of Quebec families subsequently showed a decrease in fertility relative to the rest of Canada, leaving ultimate family size unaffected. These results are consistent with the program having generated only a timing effect.     

Household inequality, social welfare, and trade

Working with Sen social welfare functions (meaning explicit separability between mean income and income dispersion), we develop a generalized dual approach to tracking household inequality aspects of social welfare in general equilibrium. We highlight how household equity can be examined analytically alongside production efficiency in duality-based models, using our dual framework to explore potential trade-offs between efficiency and equity effects of trade policy. Our results complement the set of standard inequality results in trade theory focused on functional rather than household inequality. We also find that the relative distributional impact of tariffs on welfare is conditional on the initial level of inequality.     

Trust, Inequality and Ethnic Heterogeneity

Using a large Australian social survey, combined with precise data on neighbourhood characteristics, I explore the factors that affect trust at a local level ('localised trust') and at a national level ('generalised trust'). Trust is positively associated with the respondent's education, and negatively associated with the amount of time spent commuting. At a neighbourhood level, trust is higher in affluent areas, and lower in ethnically and linguistically heterogeneous communities, with the effect being stronger for linguistic heterogeneity than ethnic heterogeneity. Linguistic heterogeneity reduces localised trust for both natives and immigrants, and reduces generalised trust only for immigrants. Instrumental variables specifications show similar results. In contrast to the USA, there is no apparent relationship between trust and inequality across neighbourhoods in Australia.     

Estate tax and lifetime income inequality

This paper constructs a heterogeneous, intertemporal general equilibrium framework which integrates both intended and unintended bequest motives to examine the long-run effects of an estate tax on the inequality of lifetime income. The results are ambiguous in general and sensitive to the type of transfer motive involved. We find that in the purely intended bequest case, an estate tax increases the steady-state inequality of net lifetime income in the case where people's elasticity of intertemporal substitution is greater than one. However, in the purely unintended bequest case, the effect of an estate tax on inequality is dependent on the probability of survival.     

The initiative,referendum, and distribution of income: An empirical analysis of Swiss cantons

This study examines how direct democratic institutions affect income distribution before and after taxes. Based on a panel of Swiss cantons from 1945 to 2014, we test the effects of the constitutional reforms of direct democratic instruments. Our findings show that better voter access to the initiative induces policy shifts that significantly decrease top incomes and benefit the upper middle class. For the popular referendum we do not find such effects. The income effects of direct democracy are not a consequence of shifts in fiscal redistribution, but rather result from policy changes affecting pre-tax incomes.     

Income taxes, spending composition and long-run growth

The focus of this paper is threefold. First, it reexamines the impact on long-run growth of changes in flat-rate income taxes when a fraction of total government expenditures is used to provide public services that affect the productivity of privately held inputs. Second, for a given tax policy, this paper studies the impact of government expenditure composition on the rate of economic growth. Third, since demographics follow an overlapping generations structure and fiscal policy affects the economy's productivity, the paper features the role of productivity as a means of redistributing income across generations. The economy is analyzed numerically and policy experiments are carried out.     

Occupational choice, incentives and wealth distribution

We consider a model of occupational choice in large economies where individuals differ in their wealth endowment. Individuals can remain self-employed or engage in productive matches with another individual, i.e., form firms. Matches are subject to a moral hazard problem with limited liability. The division of the gains from such matches is determined by competitive forces. When the incentive problem is asymmetric, matches are typically wealth-heterogeneous, with richer individuals choosing the occupation for which incentives are more important. The utilities attained within a match depend on the wealth distribution and changes in the latter give rise to ‘trickle down’ effects.     

Labor Income Taxation,Human Capital,and Growth: The Role of Childcare*

In this paper, we examine the effects of labor income taxation on growth in an overlapping generations model in which schooling and childcare play a role in the production of human capital. We compare such effects with those obtained in a model in which only schooling matters for skill formation. We show that the omission of childcare from the technology of skill formation can bias the results related to the impact of labor income taxation on growth.     

Does less inequality among households mean less inequality among individuals?

Consider an income distribution among households of the same size in which individuals, equally needy from the point of view of an ethical observer, are treated unfairly. Individuals are split into two types, those who receive more than one half of the family budget and those who receive less than one half. We look for conditions under which welfare and inequality quasi-orders established at the household level still hold at the individual one. A necessary and sufficient condition for the Generalized Lorenz test is that the income of dominated individuals is a concave function of the household income: individuals of poor households have to stand more together than individuals of rich households. This property also proves to be crucial for the preservation of the Relative and Absolute Lorenz criteria, when the more egalitarian distribution is the poorest. Extensions to individuals heterogeneous in needs and more than two types are also provided.     

Stable partnerships, matching, and local public goods

In the presence of local public goods differences in tastes are an important determinant of the way in which partnerships are formed. Heterogeneity in tastes for private vs. public goods produces a tendency to positive assortment and partnerships of couples with similar tastes; heterogeneity in tastes for different public goods brings about partnerships of couples with similar tastes only if there is a significant overlap in the distribution of tastes of the two groups to be matched. We show that with two public goods we may get negative assortment, pure positive assortment being only one of many possibilities.