Labor Income Tax Rate Research Articles

Tax Interactions among Belgian Municipalities: Does Language Matter?

This paper tests the existence of strategic interactions among municipalities using a panel of Belgian local tax rates from 1985 to 2004. A special emphasis is put on the role of the language spoken in the various municipalities. Our results first confirm previous findings for Belgium suggesting that municipalities interact with each other over the two main local tax rates, the local surcharge on the (labor) income tax rate and the local surcharge on the property tax. Using tools of spatial econometrics and an original methodology for specifying weights matrices, we find out that municipalities are sensitive to tax rates set by their close neighbors only. We also reject the hypothesis that the language does not matter: in the within model and for the local income tax rate, the intensity of interactions is shown to be lower between municipalities speaking different languages than between municipalities speaking the same language. That observation is particularly relevant for today Belgium and might be viewed as a contribution to the ongoing debate on the regionalisation or partial decentralization of some taxes.

Higher Tax Rates on Labor? Evidence from German Panel Data

This contribution investigates the justifiable spread between labor and capital income tax rates under a dual income tax, based on arguments put forth in Nielsen and Sorensen (1997). An efficient generalized instrumental variables estimator proposed by Hausman and Taylor (1981) is employed in a Mincer-type wage equation, which is estimated on recent data taken from the German Socio-Economic Panel. The estimated wage patterns yield approximations of the required divergence between the tax rates on labor and capital income for the case of university graduates. The required surcharges are sizable and exceed the ones prevailing under the current German income tax system.

Macroeconomic Implications of Alternative Tax Regimes: The Case of Greece

This paper uses a Dynamic General Equilibrium model that incorporates a detailed fiscal policy structure to examine how changes in the tax mix influence economic activity and welfare in the Greek economy. The results suggest that tax reforms that reduce the labour and capital income tax rates and increase the consumption tax rate lead to higher levels of output, consumption and private investment. If the goal of tax policy is to promote economic growth by changing the tax mix, then it should reduce the capital income tax rate and increase the consumption tax rate. In contrast, a lifetime welfare promoting policy would be to cut the labour income tax rate and increase the consumption tax rate.

Endogenous Income Taxes and Indeterminacy in Dynamic Models: When Diamond Meets Ramsey Again

This paper introduces fiscal increasing returns, through endogenous labor income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor, consumption in both periods of life and homothetic preferences (e.g., Lloyd-Braga, Nourry and Venditti, 2007). We show that under numerical calibrations of the parameters, local indeterminacy can occur for distortionary tax rates that are empirically plausible for the U.S. economy, provided that the elasticity of capital-labor substitution and the wage elasticity of the labor supply are large enough, and the elasticity of intertemporal substitution in consumption is slightly greater than unity. These indeterminacy conditions are similar to those obtained within infinite horizon models and from this point of view, Diamond meets Ramsey again.

The general equilibrium effects of fiscal policy: Estimates for the Euro area

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the Euro area. The model takes into account distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees and transfers to households. A newly computed quarterly data set of fiscal variables is used. Our results point to the prevalence of mild Keynesian effects of public expenditures. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensations for public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. The effects are more significant on the revenue side: decreases in labor income and consumption tax rates have sizeable effects on consumption and output, while a reduction in capital income tax favors investment and output in the medium run. Finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables.

Physical capital taxation and labor income taxation in an endogenous growth model with new generations

This paper examines the growth and welfare effects of physical capital taxation and labor income taxation. It is found that the impact of a rise in the physical capital tax rate on the balanced growth rate is crucially related to the birth rate, but a rise in the labor income tax rate definitely reduces the balanced growth rate regardless of the birth rate. It is also found that an increase in the physical capital income tax rate will harm the older but will benefit the younger, while an increase in the labor income tax rate will benefit the older but will harm the younger.

Optimal taxation and redistribution in an OLG model with unemployment

This paper concerns redistribution via nonlinear income taxation in an overlapping generations model with two ability-types. We assume that the wage rates are determined by bargaining between unions and firms, meaning that the equilibrium is characterized by involuntary unemployment. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. In addition, since the relationship between the employment and the capital stock implies intertemporal production inefficiency at the second best optimum, imperfect competition in the labor market may itself justify capital income taxation.

The General Equilibrium Effects of Fiscal Policy: Estimates for the Euro Area

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the euro area by means of Bayesian techniques. The model accounts for distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees, and transfers to households. A newly computed quarterly dataset of fiscal variables is used. Our results point to a prevalence of mild Keynesian effects of fiscal policy. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensation of public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. On the revenue side, decreases in labor income and consumption tax rates have a sizable effect on consumption and output, while a reduction in capital tax favors investment and output in the medium run. Finally, with the exception of transfers to households and labor income tax rates, most fiscal policy variables contribute little to the cyclical variability of the main macro variables.

Death and Taxes: The Impact of Income Taxation on Health

More progressive taxes, holding tax liability constant, generate disincentives for health investment by decreasing benefits for additional working time and, thus, decreasing returns to health. On the other hand, progressive taxation may induce individuals to invest more in health for the purpose of extending their working life, because lifetime maximization could imply less work per period but more working years. I identify the effect of progressively through differences in labor income tax rates among states. I find that the former effect dominates, more progressive taxes are negatively correlated with health, and argue that neither selection effects nor reverse causality can explain this result.

Factor taxation and labor supply in a dynamic one-sector growth model

This paper studies a class of AK-type growth models with factor income taxes, public capital stock and labor–leisure trade offs. While a higher capital tax rate reduces economic growth in the short run, the long-term growth effect is ambiguous and remains ambiguous even if the level of tax rate is larger than the degree of government externality. A higher labor income tax rate has ambiguous growth effects both in the short and long runs. However, if the intertemporal elasticity of substitution for labor supply is sufficiently small, a higher labor tax rate always lowers economic growth in the long run, despite the existence of productive government taxation.

Fiscal policy and regional inflation in a currency union

Substantial attention has been devoted to inflation differentials within the European Monetary Union, including suggestions that inflation differentials are a policy issue for national governments. This paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy. In a two-region general equilibrium model with traded and nontraded goods, lowering the labor income tax rate in response to positive inflation differentials succeeds in compressing inflation differentials. Such policies can lead to higher volatility of domestic inflation while leaving the volatility of real output roughly unchanged. Regional fiscal policies also have spill-over effects on the volatility of union-wide and foreign inflation in our model.

China's value-added tax reform, capital accumulation, and welfare implications

This paper analyzes the effects of China's upcoming value-added tax (VAT) reform of removing investment from the tax base on capital accumulation and the welfare of the rich and the poor. Three alternative methods to make up for the loss of tax revenue are considered. The VAT reform with consumption tax being endogenous increases capital accumulation and the utility of both the rich and the poor. The VAT reform with the labor income tax rate being endogenous increases capital accumulation; and it decreases the utility of the rich and increases the utility of the poor (increases the utility of both the rich and the poor) if the rich has a higher rate or the same rate of time preference (if the rich has a lower rate of time preference). The VAT reform, accompanied by a cut in transfers to the poor, has no effect on capital accumulation if the rich and the poor have the same rate of time preference; it decreases (increases) capital accumulation if the rich has a higher (lower) rate of time preference; and it increases the utility of the rich and decreases the utility of the poor.

Political economy of taxation in an overlapping-generations economy

This paper analyzes the effects of intergenerational conflict on capital and labor income tax rates, transfers, and government spending in a model of multidimensional policy choice. The different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. A natural link also emerges between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement.

Dynamic scoring: Alternative financing schemes

Neoclassical growth models predict that reductions in capital or labor income tax rates are expansionary when lump-sum transfers are used to balance the government budget. This paper explores the consequences of bond-financed tax reductions that bring forth a range of possible offsetting policies, including future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can be expansionary or contractionary. The paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts.

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.

Non-cooperative Households and the Size and Composition of Public Expenditure

This paper presents a model in which the composition and size of public spending are determined through a political process. Agents differ in wage rates, and live in households positively sorted by wage; household production benefits both partners but the partners interact non-cooperatively, hence the laissez-faire equilibrium is inefficient. There are three policy tools, a labour income tax rate, a cash transfer and an in-kind transfer. The latter can be combined with household production to generate a household public good. All agents agree on some form of public intervention to remedy the inefficiency, but low-wagers prefer high taxes and cash transfers, while high-wagers prefer low taxes and in-kind provision. Under the empirically plausible assumption that voting participation is positively correlated with income, the equilibrium policy will be of the sort preferred by voters with above-mean income. This effect is accentuated by increased inequality.

Rolling back the public sector: differential effects on employment, investment, and growth

The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock, and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment, and non-Walrasian labour markets on these results are considered as well.

Expansionary Fiscal Shocks and the Trade Deficit

In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.

Expansionary Fiscal Shocks and the US Trade Deficit*

AbstractIn this paper, we use a dynamic general equilibrium model of an open economy to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labour income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the US trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of 1 percentage point of gross domestic product (GDP) induces the trade balance to deteriorate by 0.2 percentage point of GDP or less. Noticeably larger effects are only likely to be elicited under implausibly high values of the short‐run trade price elasticity, or of the share of liquidity‐constrained households in the economy. From a policy perspective, our analysis suggests that even reducing the current US fiscal deficit (of 3% of GDP) to zero would be unlikely to narrow the burgeoning US trade deficit significantly.

Expansionary Fiscal Shocks and the Trade Deficit

In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.