Creator: Chari, V. V., Jones, Larry E., and Marimon, Ramon, 1953- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 582 Abstract:
In U.S. elections, voters often vote for candidates from different parties for president and Congress. Voters also express dissatisfaction with the performance of Congress as a whole and satisfaction with their own representative. We develop a model of split-ticket voting in which government spending is financed by uniform taxes but the benefits from this spending are concentrated. While the model generates split-ticket voting, overall spending is too high only if the president’s powers are limited. Overall spending is too high in a parliamentary system, and our model can be used as the basis of an argument for term limits.
Subject (JEL): H40 - Publicly Provided Goods: General, H00 - Public Economics: General, and H30 - Fiscal Policies and Behavior of Economic Agents: General
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.
Keyword: Skill investment, Labor supply, Tax progressivity, Incomplete markets, Income distribution, and Life cycle Subject (JEL): J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, J22 - Time Allocation and Labor Supply, H20 - Taxation, Subsidies, and Revenue: General, D30 - Distribution: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), and H40 - Publicly Provided Goods: General
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 496 Abstract:
What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. On the other hand, progressivity reduces incentives to work and to invest in skills, distortions that are especially costly when the government must finance public goods. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preference, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the desire to finance government purchases play quantitatively similar roles in limiting optimal progressivity. In a version of the model where poverty constrains skill investment, optimal progressivity is close to the U.S. value. An empirical analysis on cross-country data offers support to the theory.
Keyword: Skill investment, Cross-country evidence, Partial insurance, Labor supply, Tax progressivity, Income distribution, Welfare, and Government expenditures Subject (JEL): E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), H40 - Publicly Provided Goods: General, H20 - Taxation, Subsidies, and Revenue: General, D30 - Distribution: General, J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, and J22 - Time Allocation and Labor Supply
Creator: Chari, V. V. and Jones, Larry E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 142 Abstract:
We examine the validity of one version of the Coase Theorem: In any economy in which property rights are fully allocated, competition will lead to efficient allocations. This version of the theorem implies that the public goods problem can be solved by allocating property rights fully and letting markets do their work. We show that this mechanism is not likely to work well in economies with either pure public goods or global externalities. The reason is that the privatized economy turns out to be highly susceptible to strategic behavior in that the free-rider problem in public goods economies manifests itself as a complementary monopoly problem in the private goods economy. If the public goods or externalities are local in nature, however, market mechanisms are likely to work well.
Our work is related to the recent literature on the foundations of Walrasian equilibrium in that it highlights a relationship among the appropriateness of Walrasian equilibrium as a solution concept, the incentives for strategic play, the aggregate level of complementarities in the economy, and the problem of coordinating economic activity.
Keyword: Externalities, Public goods, Complementary monopoly, and Free-rider problem Subject (JEL): H40 - Publicly Provided Goods: General, D50 - General Equilibrium and Disequilibrium: General, and D60 - Welfare Economics: General