Creator: Guner, Nezih, Kaygusuz, Remzi, and Ventura, Gustavo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 660 Abstract:
We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.
Keyword: Labor force participation, Taxation, and Two-earner households Subject (JEL): H31 - Fiscal Policies and Behavior of Economic Agents: Household, J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse, J22 - Time Allocation and Labor Supply, and E62 - Fiscal Policy
Creator: Heathcote, Jonathan, Perri, Fabrizio, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 436 Abstract:
We conduct a systematic empirical study of cross-sectional inequality in the United States, integrating data from the Current Population Survey, the Panel Study of Income Dynamics, the Consumer Expenditure Survey, and the Survey of Consumer Finances. In order to understand how different dimensions of inequality are related via choices, markets, and institutions, we follow the mapping suggested by the household budget constraint from individual wages to individual earnings, to household earnings, to disposable income, and, ultimately, to consumption and wealth. We document a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours worked sharpen the rise in earnings inequality before 1982, but mitigate its increase thereafter. Taxes and transfers compress the level of income inequality, especially at the bottom of the distribution, but have little effect on the overall trend. Finally, access to financial markets has limited both the level and growth of consumption inequality.
Keyword: Wage dynamics, Inequality over the life cycle, and Consumption, income, and wealth inequality Subject (JEL): J31 - Wage Level and Structure; Wage Differentials, D31 - Personal Income, Wealth, and Their Distributions, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
In the early 1970s, hours worked per working-age person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked.
Keyword: Hours worked, Distortionary taxes, Total factor productivity, and Dynamic general equilibrium Subject (JEL): E13 - General Aggregative Models: Neoclassical, C68 - Computable General Equilibrium Models, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Krueger, Dirk and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 262 Abstract:
We explore the welfare consequences of different taxation schemes in an economy where agents are debt-constrained. If agents default on their debt, they are banned from future credit markets, but retain their private endowments which are subject to income taxation. A change in the tax system changes the severity of punishment from default and, hence, leads to a limitation of possible risk sharing via private contracts. The welfare consequences of a change in the tax system depend on the relative magnitudes of increased risk sharing forced by the new tax system and the reduced risk sharing in private insurance markets. We quantitatively address this issue by calibrating an artificial economy to US income and tax data. We show that for a plausible selection of the structural parameters of our model, the change to a more redistributive tax system leads to less risk sharing among individuals and lower ex-ante welfare.
Keyword: Risk Sharing, Redistributive Taxation, and Incomplete Markets Subject (JEL): D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, E62 - Fiscal Policy, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Heathcote, Jonathan and Tsujiyama, Hitoshi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 507 Abstract:
What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.
Keyword: Optimal income taxation, Tax progressivity, Social welfare functions, Private insurance, Flat tax, Mirrlees taxation, and Ramsey taxation Subject (JEL): H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, E62 - Fiscal Policy, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, and H31 - Fiscal Policies and Behavior of Economic Agents: Household