Optimal Income Redistribution Research Articles

Redistribution and pollution taxes with non-linear Engel curves

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Artists, engineers, and aspects of economic growth in a creative region

We study aspects of economic growth in a region that is creative a la Richard Florida. Members of the creative class possess creative capital and they fall into one of two possible groups---they are either artists or engineers. We describe the optimal income redistribution rule that maximizes the creative class's average steady state income. Because this average income is increasing in the physical capital per creative class member ratio, the rule requires a regional authority to redistribute income away from (towards) the group that saves a lower (higher) fraction of its income. This is a negative finding in the sense that the rule's implementation will tend to favor the group that already saves more. Even so, the finding is consistent with the observation made by some researchers that there is a connection between income inequality and regions in which the creative class performs a large part of all economic activities.

A Note on Optimal Income Redistribution in a Creative Region

We study optimal income redistribution in a region that is creative in the sense of Richard Florida and thereby extend aspects of the recent analysis in Batabyal and Beladi (2017). Using the terminology of these researchers, members of the creative class are either artists or engineers. This bipartite grouping stems from the manner in which creative capital is acquired by the artists and the engineers. Specifically, we show that when the savings rates of the artists and the engineers comprising the creative class satisfy a particular inequality, it is possible for a regional authority (RA) to uniquely redistribute income between these two groups in a way that achieves the so called “golden rule” stock of physical capital.

Should Pollution Taxes Be Targeted at Income Redistribution?

This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, the Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Should Pollution Taxes Be Targeted at Income Redistribution?

This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, the Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Tax Preparation Services for Low- and Moderate-Income Households: Preliminary Evidence from a New Survey

In this paper, we examine financial service patterns among low- and moderate-income households as these patterns relate to the tax and withholding system, as well as the process of filing ones taxes. Using a unique data set of low- and moderate-income households, we argue that the federal income tax system provides a unique opportunity to influence low- and moderate-income households' financial decisions. The federal income tax system provides an interesting and important context to study the financial service patterns of low- and moderate-income households for several reasons. First, an overwhelming majority of low- and moderate-income households file tax returns and are eligible for tax refunds. Given the societal goal of redistributing income to low- and moderate-income households through the tax system, optimal income redistribution policy suggests that policymakers focus on reducing the transaction costs associated with tax filing for low-income households. Second, households who face high transaction costs in filing their taxes often face other types of financial constraints, such as not having a bank account or access to credit. Any policy initiative to lower the transaction costs in filing taxes must also consider low-income households financial services patterns and their use of AFS providers. Third, many low- and moderate-income households receive a large, lump sum at the time of their tax refund. Tax return filing and refund receipt may be important moments for household decision-making regarding saving, and thus for savings policy.

Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax

This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. Using general utility structures and exploring both linear and non-linear taxes, it is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds, since it equals one in the optimal tax system. In the optimum, distortions of income taxes are equal to marginal redistributional gains. If the government does not have access to a non-distortionary marginal source of finance, the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution. The optimal second-best corrective tax is then either higher or lower than the Pigouvian level. The findings in this paper generalize and amend prior results based on representative-agent models, shedding new light on the weak double-dividend hypothesis, and on the welfare gains of recycling revenue from environmental taxes.

Optimal Income Redistribution and Capital Market Integration

This paper shows that, from the viewpoint of income redistribution and under the assumption of a positive correlation between labor income and capital income, capital market integration requires a shift from capital taxation to labor taxation. A higher degree of capital mobility lowers the capital tax rate, and the reduced redistribution of capital income should be counteracted by greater redistribution of labor income. Therefore, this paper argues for a more redistributive labor tax as a remedy for the detrimental effect of capital tax competition on income redistribution.

Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.

Tagging and redistributive taxation with imperfect disability monitoring

This paper studies the optimal income redistribution and optimal monitoring when disability benefits are intended for disabled people but some of the disabled do not claim disability benefits and enter the labor force. Classification errors also occur. Some able applicants with high distaste for work are falsely granted disability benefits (type II errors) and some disabled applicants are denied disability benefits (type I errors). The accuracy of monitoring depends on the resources devoted to it. Labor supply responses are at the extensive margin. The paper derives the optimal income tax-transfer schedule that incorporates welfare and disability benefits and takes into account monitoring costs. The cost of monitoring and the co-existence of welfare and disability benefits play in favor of Earned Income Tax Credits for disabled workers who forgo disability benefits as well as for disabled workers who forgo welfare assistance.

Take It or Leave It: Take-Up, Optimal Transfer Programs, and Monitoring

This paper studies the optimal income redistribution and optimal monitoring when disability benefits are intended for disabled people but when some able agents with high distaste for work mimic them (type II errors). Labor supply responses are at the extensive margin and endogenous take-up costs may burden disabled recipients (because of either a reputational externality caused by cheaters or a snowball effect). Under paternalistic utilitarian preferences that do not compensate for distaste for work, inactive disabled recipients should obtain strictly lower consumption than disabled workers. The cost of monitoring supports adoption of an Earned Income Tax Credit. However, and surprisingly, with or without take-up costs, even if perfect monitoring is costless, it proves optimal to have type II errors. These results are robust to a utilitarian criterion. The paper provides numerical simulations calibrated on U.S. data.

Take it or Leave it: Optimal Transfer Programs, Monitoring and Takeup

This paper studies the optimal income redistribution and monitoring when disability benefits are intended for disabled people but where some able agents with high distastes for work mimic them (type II errors). Labor supply responses are at the extensive margin and endogenous takeup costs burden disabled recipients (due to a reputational externality caused by cheaters or due to a snowball effect). Under a non-welfarist criterion which does not compensate for distaste for work, (inactive) disabled recipients get a strictly lower consumption than disabled workers. The usual conditions under which the optimal transfer program is a Negative Income Tax or an Earned Income Tax Credit are challenged, due to monitoring. We also show that even if perfect monitoring is costless, it is optimal to have type II errors. These results are robust to a utilitarian criterion. Numerical simulations calibrated on US data are provided.

Redistribution and Fiscal Policy

Abstract: This paper studies the optimal behavior of a democratic government in its use of fiscal policies to redistribute income. First, I characterize the optimal Ramsey allocation in heterogeneous agents' version of the neoclassical growth model. Second, I show that if I follow the empirical evidence in Storesletten, Telmer, and Yaron (2002) and assume labor income inequality to be countercyclical, fiscal policy is also highly countercyclical, challenging the Chari, Christiano, and Kehoe (1994) result that labor taxes should be smooth over the cycle. JEL classification: E62, E64 Key words: optimal taxation, income distribution 1. Introduction This paper examines the optimal behavior of a democratic government in its use of fiscal policies to redistribute income over the business cycle. On the theoretical side, one set of models study optimal redistribution under either no or idiosyncratic uncertainty; for example, Perotti (1993) and Persson, and Tabellini (1994) study the e.ects of income inequality on growth. In addition, Krusell, Rios-Rull, and Quadrini (1997) and Krusell, and Rios-Rull (1999) have worked on the effects of inequality on optimal fiscal policies in a recursive framework. All these papers conclude that the higher the inequality the higher the income taxes and the optimal income redistribution. Another set of models incorporate aggregate uncertainty and study optimal taxation in a representative agent environment: Chari, Christiano, and Kehoe (1994) study optimal taxation in a neoclassical growth model and Gorostiaga (2002) extend their analysis to one in which labor markets are not competitive. Both papers find that labor income taxes should be roughly constant over the cycle to minimize distortions. On the empirical side, Storesletten, Telmer, and Yaron (2002) have provided evidence that income inequality is countercyclical; increasing in recessions and decreasing in expansions. Therefore, the combination of this empirical fact with the theoretical results from optimal redistribution suggest that if we consider a model with heterogeneous agents and countercyclical income inequality the smoothing labor income taxes result may be challenged. In this paper, we study this possibility using a heterogeneous agents version of the neoclassical growth model. The environment is a stochastic dynamic general equilibrium model with three agents: two infinitely lived consumers with different skill levels and a government that maximizes the median voter utility. (1) We assume that the fraction of each consumer type is constant over time and that the fraction of low skilled households is bigger than the fraction of high skilled. Consumers supply labor elastically and are able to borrow and lend in a complete markets environment. The government sets labor income taxes and transfers. Technology is linear and separable on agent's labor and there is an aggregate productivity shock that affects households skill level. A Ramsey problem is defined where the low skilled household plays the role of the planner and he/she optimizes over all possible sequences. We consider two versions of the aggregate productivity shock: First, we assume that the cycle affects both agents symmetrically, leaving the skill level and the labor income inequality constant over the business cycle. This version is called the Symmetric Shock Model. Second, we take a more realistic approach and follow the empirical evidence in Storesletten, Telmer, and Yaron (2002) and assume labor income inequality to be countercyclical. The productivity shock only affects the lower skill level and labor income inequality increases in recessions and decreases in expansion. This case is labeled as the Asymmetric Shock Model. The main result is the following: If labor income inequality is countercyclical Chari, Christiano, and Kehoe (1994) result does not hold and the optimal labor income tax is also countercyclical. …

Costly (Dis)Agreement: Optimal Intervention, Income Redistribution, and Transfer Efficiency of Output Quotas in the Presence of Cheating

This study builds on previous work by Giannakas and Fulton (2003, 2000) on the economics of output quotas in the presence of cheating by examining the efficiency of the policy in transferring income to producers as well as the optimal regulatory response to enforcement costs and farmer noncompliant behavior in a decentralized policy making environment. Analytical results show that enforcement costs and cheating change the transfer efficiency of output quotas, the level of intervention that transfers a given surplus to producers, the socially optimal income redistribution, and the social welfare from intervention. The incidence of the policy is shown to depend on the relative political preferences of the policy makers and the policy enforcers making the consideration of the decentralized policy making structure critical in analyzing output quotas in the presence of cheating.

The economics of coupled farm subsidies under costly and imperfect enforcement

AbstractThis study relaxes the assumption of perfect and costless policy enforcement found in traditional agricultural policy analysis and introduces enforcement costs and cheating into the economic analysis of output subsidies. Policy design and implementation is modeled in this paper as a sequential game between the regulator who decides on the level of intervention, an enforcement agency that determines the level of policy enforcement, and the farmer who makes the production and cheating decisions. Analytical results show that farmer compliance is not the natural outcome of self‐interest and complete deterrence of cheating is not economically efficient. The analysis also shows that enforcement costs and cheating change the welfare effects of output subsidies, the efficiency of the policy instrument in redistributing income, the level of government intervention that transfers a given surplus to agricultural producers, the socially optimal income redistribution, and the social welfare from intervention.

Local income redistribution: A club-theoretic analysis

This paper analyzes optimal income redistribution in a club model where interclub transfers are ruled out (redistribution must proceed on a local level in heterogeneous clubs). This assumption induces a trade-off between equity and efficiency in that the efficiency loss associated with club heterogeneity must be borne in order for redistribution to occur. The optimal club structure depends on society's evaluation of this trade-off.

The Exact Measurement of Welfare Losses Which Result from Trade Taxes

Discussions concerning measurement of welfare losses from tariffs and export subsidies have a long history. These discussions are carried out usually on two different levels. On one level, consumer and producer surpluses play a central role and local approximations are used to derive welfare loss measures. On another level the discussion is carried out in terms of indifference curves and production possibility curves in a two commodity world, providing global welfare loss measures (see, for example, [1], [2] and [3]). The relation between the local analysis and the global analysis is very much confused; particularly in the n commodity case. Since the n dimensional case lends itself to a global analysis, and since the global analysis can be nicely related to consumer and producer surplus measures, it seems desirable to put the two approaches in a unified framework and make the relation between them clear. This task is undertaken below. In Section 2 the analysis is carried out under the assumption that there exist community indifference curves. In Section 3 the analysis is extended to a multiconsumer economy without socially optimal income redistribution.