Optimal Income Tax Research Articles

Optimal Income Taxation in Unionized Labor Markets

Optimal Income Taxation in Unionized Labor Markets

Optimal Income Taxation in Unionized Labor Markets

This paper extends the Diamond (1980) model with labor unions to study optimal income taxation and to analyze whether unions can be desirable for income redistribution. Unions bargain with firms over wages in each sector and firms unilaterally determine employment. Unions raise the efficiency costs of income redistribution, because unemployment benefits and income taxes raise wage demands and thereby generate involuntary unemployment. Optimal unemployment benefits and optimal income taxes are lower in unionized labor markets. We show that unions are socially desirable only if they represent (low-income) workers whose participation is subsidized on a net basis. By creating implicit taxes on work, unions alleviate the labor-market distortions caused by income taxation. Numerical simulations demonstrate that optimal taxes and transfers are much less redistributive in unionized labor markets than in competitive labor markets.

Optimal Taxation of Robots

I study the optimal taxation of robots and labor income. In the model, robots substitute for routine labor and complement non-routine labor. I show that while it is optimal to distort robot adoption, robots may be either taxed or subsidized. The robot tax exploits general-equilibrium effects to compress the wage distribution. Wage compression reduces income-tax distortions of labor supply, thereby raising welfare. In the calibrated model, the optimal robot tax for the US is positive and generates small welfare gains. As the price of robots falls, inequality rises but the robot tax and its welfare impact become negligible.

Welfare-improving Consumption Tax in the Presence of a Wage Tax under Idiosyncratic Returns from Investment and Incomplete Markets

In a standard multi-period model, consumption tax and wage tax are equivalent. I show that when a capital market is incomplete---in the sense that the rates of return from risky investments are idiosyncratic and there is no insurance for such idiosyncratic risk---the introduction of consumption tax in the presence of wage tax improves welfare. This holds true even in the presence of optimal or non-optimal capital income taxes. In the general equilibrium model, the optimal level of consumption tax is determined to balance the benefits of the risk-sharing effect and asset accumulation effect and the costs of postponing government revenue to later periods.

Optimal Mixed Taxation, Credit Constraints and the Timing of Income Tax Reporting

We study optimal income and commodity tax policy with credit-constrained low-income households. Workers are assumed to receive an even ow of income during the tax year, but make tax payments or receive transfers at the end of the year. They use their disposable income to purchase multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson-Stiglitz Theorem conditions apply. When the optimal policy leaves low-income households with binding credit constraints, it is optimal to subsidize the good that is consumed in higher proportion by them. We show that this involves subsidizing more goods that fulfill basic needs, such as food or dwelling. The benefits of such subsidies have to be balanced with the costs of financing them, since unconstrained households also benefit from the rebate early in the fiscal year.

Optimal Tax Structure for Consumption and Income Inequality: An Empirical Assessment

In the present empirical analysis, we try to assess the impact of taxation on investment growth. In particular, and by using gross fixed capital formation as a proxy for investment, we intend to evaluate the impact of the taxation structure in investment dynamics, in a short and a long-run perspectives. This empirical exercise was conducted for all OECD countries, during the 1980-2015 period. Through panel data econometric techniques, we find optimal tax-investment threshold values, especially higher for short-term than for long-term horizon. In addition, we find optimal income taxation around 9%, in percentage of GDP, an average optimal value of 12.7% for consumption taxes to promote annual investment growth.

Structural Labour Supply Models and Microsimulation

The purpose of the paper is to provide a discussion of the various approaches for accounting for labour supply responses in microsimulation models. The paper focus attention on two methodologies for modelling labour supply: 1) The discrete choice model. 2) The random utility – random opportunities model The paper then describes approaches to utilising these models for policy simulation in terms of producing and interpreting simulation outcomes, outlining an extensive literature of policy analyses utilising these approaches. Labour supply models are not only central for analyzing behavioural labour supply responses but also for identifying optimal tax-benefit systems, given some of the challenges of the theoretical approach. Combining labour supply results with individual and social welfare functions enables the social evaluation of policy simulations. Combining welfare functions and labour supply functions, the paper discusses how to model socially optimal income taxation.

European fiscal solidarity: an EU-wide optimal income tax approach

The current financial crisis has brought Europe to a critical juncture. In this paper, we map fiscally the United States of Europe. We simulate an optimal EU-wide income tax and calculate the implied cross-country transfers. The comparison of the implied transfers with the real transfers shows how insufficient the actual transfers are in reducing income disparities across the EU. Moreover, to evaluate the chances for a stronger European fiscal integration within different (core-) groups of member states, we illustrate the winners and losers from optimal EU-wide income redistribution across the Union. While the need for centralised redistribution grows with the number of heterogeneous member states, the implementation of a European income tax becomes, at the same time, ever more unlikely.

European fiscal solidarity: an EU-wide optimal income tax approach

The current financial crisis has brought Europe to a critical juncture. In this paper, we map the fiscally United States of Europe. We simulate an optimal EU-wide income tax and calculate the implied cross-country transfers. The comparison of the implied transfers with the real transfers shows how insufficient the actual transfers are to reduce income disparities across the EU. Moreover, to evaluate the chances for a stronger European fiscal integration within different (core-) groups of member states, we illustrate the winners and losers from an optimal EU-wide income redistribution across the Union. While the need for centralized redistribution grows with the number of heterogeneous member states, the implementation of a European income tax becomes at the same time ever more unlikely.

Jointly Optimal Taxes for Different Types of Income

We develop and estimate a model of jointly optimal income taxes for different types of income. Compared to standard optimal tax formulas, optimal schedular income tax rates additionally depend on cross-elasticities between tax bases capturing fiscal externalities. We discuss two applications: the taxation of different income sources such as labor or capital income and the taxation of couples. For these applications, we calculate income type-specific optimal tax rates for Germany using rich panel data from administrative tax records. We first estimate income-type specific elasticities with respect to the next-of-tax rate and show that responses to taxes differ substantially by income source and by gender. Second, we calculate social welfare weights implicit in the German personal income tax schedule which again differ between income sources and by gender. Using these estimates, we consider a tax simplification reform by calculating optimal schedular linear income tax rates. We find that optimal tax rates are significantly lower for labor income than for self-employment and capital income as well as for married women than men.

Is high-skilled migration harmful to tax systems’ progressivity

Decreased transportation costs have led to the transmission of ideas and values across national borders that has helped reduce the barriers to international labor mobility. In this context, high-skilled individuals are more likely to vote with their feet in response to high income taxes. It is thus important to examine the magnitude of tax-driven migration responses in developed countries as well as the possible consequences of income tax competition between nation states. More specifically, how does the potential threat of migration affect a country’s optimal income tax policies?

Optimal tax enforcement and the income tax rate: the role of taxable income inequality

This paper considers the problem of jointly determining the optimal income tax rate and the optimal degree of enforcement by the authorities. It extends the analysis of Keen and Slemrod, who combine the well-known elasticity of taxable income with an enforcement elasticity of taxable income. The model is extended to the many-person context with both differing wages and preferences, and with a tax and transfer system along with the desire for redistribution on the part of the government. The effect of inequality, defined in terms of an equally-distributed-equivalent taxable income measure, is explored. There is also government expenditure on a pure public good. The model is also extended to allow for a direct effect on labour supply of tax enforcement, and the implications for the optimal enforcement gap.

Optimal Taxation and Human Capital Policies over the Life Cycle

This paper derives optimal income tax and human capital policies in a life cycle model with risky human capital. The government faces asymmetric information regarding agents’ ability, its evolution, and labor supply. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base and falls with age. Income-contingent loans or a deferred deductibility scheme can implement the optimum. Numerical results suggest that full deductibility of expenses is close to optimal and that simple linear age-dependent policies perform very well.

Optimal skill distribution under convex skill costs

This paper studies optimal distribution of skills in an optimal income tax framework with convex skill constraints. The problem is cast as a social planning problem where a redistributive planner chooses how to distribute a given amount of aggregate skills across people. We find that optimal skill distribution is either perfectly equal or perfectly unequal, but an interior level of skill inequality is never optimal.

Subjective well‐being, consumption comparisons, and optimal income taxation

AbstractWe introduce reference consumption into the standard utility function from optimal tax analysis. Individuals compare their consumption “narrowly” with those of the same productivity, or “broadly” with the average consumption across society. In both narrow and broad equilibria reference consumption is an increasing function of the tax parameters, so generating new theoretical results. Individual well‐being decreases with the net wage (net‐of‐tax) rate for low productivity workers under narrow (broad) comparisons, thus adjusting redistributive taxation considerations. Further, in both cases reference consumption distorts labor supply away from the social optimum level, giving a distortion‐correcting role for taxation.

Optimal Income Taxation and Job Choice

AbstractIn this paper, we study optimal income taxation when different job types exist for workers of different skills. Each job type has some feasible range of incomes from which workers choose by varying labor supply. Workers are more productive than others in the jobs that suit them best. The model combines features of the classic optimal tax literature with labor variability along the intensive margin, with the extensive‐margin approach where workers make discrete job choices and/or participation decisions. We find that first‐best maximin utility can be achieved in the second‐best, and marginal tax rates below the top can be negative or zero.

Pareto weights in practice: A quantitative analysis across 32 OECD countries

We develop a quantitative heterogeneous-agents general equilibrium model that reproduces the income inequalities of 32 countries in the Organization for Economic Co-operation and Development. Using this model, we compute the optimal income tax progressivity and redistribution for each country under the equal-weight utilitarian social welfare function. A policy reform to adopt the optimal progressivity is supported by the majority of the population. Finally, we uncover the Pareto weights in the social welfare functions of each country that justify the current redistribution policy.

On the optimal lifetime redistribution and social objectives: a multidimensional approach

We characterize optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life cycle and this preference together with productivity is non-observable to government. We consider different social objectives and incorporate a novel approach taken in the spirit of Roemer (Equality of opportunity, Harvard University Press, Harvard, 1998) and Van de Gaer (Equality of opportunity and investments in human capital, Katholieke Universiteit Leuven, 1993). This approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also numerically examine the properties of an optimal lifetime redistribution policy. We find support for a nonlinear tax/pension program in which impatient types are taxed at the margin, and patient low ability types are subsidized in their retirement consumption. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between different social objectives, indicating that the optimal income taxation results are sensitive to the choice of the social planner’s goals.

Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal?

This paper studies optimal non-linear income taxation in an empirically plausible model with labor supply responses at the intensive (hours, effort) and the extensive (participation) margin. In this model, redistributive taxation gives rise to a previously neglected trade-off between two aspects of efficiency: To reduce the deadweight loss from distortions at the extensive margin, the social planner has to increase distortions at the intensive margin and vice versa. Due to this trade-off, minimizing the overall deadweight loss requires to distort labor supply by low-skill workers upwards at both margins. Building on these insights, the paper is the first to provide conditions under which social welfare is maximized by an Earned Income Tax Credit with negative marginal taxes and negative participation taxes at low income levels.

Double Limit Analysis of Optimal Personal Income Taxation

A double limit analysis is developed to determine the optimal personal income tax based on the principle that moving a marginal dollar of tax revenue from one income interval to another should not raise social welfare. The first order condition can be differentiated with respect to an interval boundary to yield a second order differential equation for the optimal income tax that can be solved to yield general solutions. Application of an optimal income tax to a broader income range in general reduces tax revenues and requires greater subsidies at low income levels.