Creator: Chen, Daphne, Guvenen, Fatih, Kambourov, Gueorgui, Kuruscu, Burhanettin, and Ocampo, Sergio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 764 Abstract:
How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
Stichwort: Capital income tax, Wealth taxation, Wealth inequality, Power law models, and Rate of return heterogeneity Fach: E21 - Macroeconomics: Consumption; Saving; Wealth, H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, E22 - Investment; Capital; Intangible Capital; Capacity, and E62 - Fiscal Policy
Creator: Boerma, Job and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 763 Abstract:
During the past two decades, households experienced increases in their average wages and expenditures alongside with divergent trends in their wages, expenditures, and time allocation. We develop a model with incomplete asset markets and household heterogeneity in market and home technologies and preferences to account for these labor market trends and assess their welfare consequences. Using micro data on expenditures and time use, we identify the sources of heterogeneity across households, document how these sources have changed over time, and perform counterfactual analyses. Given the observed increase in leisure expenditures relative to leisure time and the complementarity of these inputs in leisure technology, we infer a significant increase in the average productivity of time spent on leisure. The increasing productivity of leisure time generates significant welfare gains for the average household and moderates negative welfare effects from the rising dispersion of expenditures and time allocation across households.
Stichwort: Leisure productivity, Inequality, Consumption, and Time use Fach: J22 - Time Allocation and Labor Supply, D10 - Household Behavior: General, D60 - Welfare Economics: General, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Chodorow-Reich, Gabriel, Karabarbounis, Loukas, and Kekre, Rohan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 758 Abstract:
The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment away from taxes toward spending or away from capital taxes toward other taxes would generate longer-term production and consumption gains. Eliminating the rise in transfers to households during the boom would significantly reduce the burden of tax adjustment in the bust and the magnitude of the depression.
Stichwort: Greek depression, Taxes, Fiscal policy, Nominal rigidity, and Productivity Fach: E44 - Financial Markets and the Macroeconomy, E62 - Fiscal Policy, F41 - Open Economy Macroeconomics, E32 - Business Fluctuations; Cycles, and E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data)
Creator: Guvenen, Fatih, Mataloni Jr., Raymond J., Rassier, Dylan G., and Ruhl, Kim J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 751 Abstract:
Official statistics display a significant slowdown in U.S. aggregate productivity growth that begins in 2004. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Under international statistical guidelines, profit shifting causes part of U.S. production generated by multinationals to be excluded from official measures of U.S. production. Profit shifting has increased significantly since the mid-1990s, resulting in lower measures of U.S. aggregate productivity growth. We construct an alternative measure of value added that adjusts for profit shifting. The adjustments raise aggregate productivity growth rates by 0.09 percent annually for 1994-2004, 0.24 percent annually for 2004-2008, and lowers annual aggregate productivity growth rates by 0.09 percent after 2008. Our adjustments mitigate, but do not eliminate, the measured productivity slowdown. The adjustments are especially large in R&D-intensive industries, which most likely produce intangible assets that facilitate profit shifting. The adjustments boost value added in these industries by as much as 8 percent in the mid-2000s.
Stichwort: Formulary apportionment, Productivity slowdown, and Tax havens Fach: E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, F23 - Multinational Firms; International Business, and O40 - Economic Growth and Aggregate Productivity: General
Creator: Bloom, Nicholas, Guvenen, Fatih, Price, David J., Song, Jae, and von Wachter, Till Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 750 Abstract:
We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We ﬁnd that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred between firms. However, this rising between-firm variance is not accounted for by the firms themselves: the firm-related rise in the variance can be decomposed into two roughly equally important forces—a rise in the sorting of high-wage workers to high-wage firms and a rise in the segregation of similar workers between firms. In contrast, we do not ﬁnd a rise in the variance of firm-speciﬁc pay once we control for worker composition. Instead, we see a substantial rise in dispersion of person-speciﬁc pay, accounting for 68% of rising inequality, potentially due to rising returns to skill. The rise in between-firm variance, mostly due to worker sorting and segregation, accounted for a particularly large share of the total increase in inequality in smaller and medium firms (explaining 84% for firms with fewer than 10,000 employees). In contrast, in the very largest firms with 10,000+ employees, 42% of the increase in the variance of earnings took place within firms, driven by both declines in earnings for employees below the median and a substantial rise in earnings for the 10% best-paid employees. However, because of their small number, the contribution of the very top 50 or so earners at large firms to the overall increase in within-firm earnings inequality is small.
Stichwort: Income inequality, Between-firm inequality, and Pay inequality Fach: J21 - Labor Force and Employment, Size, and Structure, J31 - Wage Level and Structure; Wage Differentials, and E23 - Macroeconomics: Production
Creator: Cavallo, Michele, Del Negro, Marco, Frame, W. Scott, Grasing, Jamie, Malin, Benjamin A., and Rosa, Carlo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 747 Abstract:
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.
Stichwort: Central bank balance sheets, Remittances, and Monetary policy Fach: E59 - Monetary Policy, Central Banking, and the Supply of Money and Credit: Other, E58 - Central Banks and Their Policies, and E69 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: Other
Creator: Boerma, Job and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 746 Abstract:
We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Home production does not offset differences that originate in the market sector because productivity differences in the home sector are significant and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. The optimal tax system should feature more progressivity taking into account home production.
Stichwort: Inequality, Labor supply, Home production, and Consumption Fach: D10 - Household Behavior: General, J22 - Time Allocation and Labor Supply, E21 - Macroeconomics: Consumption; Saving; Wealth, and D60 - Welfare Economics: General
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 745 Abstract:
We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
Stichwort: Capital income tax, Border adjustment, Value-added taxes, Origin- and destination-based taxation, Free trade, and Production efficiency Fach: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E62 - Fiscal Policy
Creator: Ayres, João, Hevia, Constantino, and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 743 Abstract:
In this paper, we show that a substantial fraction of the volatility of real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar can be accounted for by shocks that affect the prices of primary commodities such as oil, aluminum, maize, or copper. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated ﬁnal goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.
Stichwort: Primary commodity prices and Real exchange rate disconnect puzzle Fach: F31 - Foreign Exchange and F41 - Open Economy Macroeconomics
Creator: Eggertsson, Gauti B., Mehrotra, Neil R., and Robbins, Jacob A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 742 Abstract:
This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from -1.5% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Stichwort: Secular stagnation, Zero lower bound, and Monetary policy Fach: E32 - Business Fluctuations; Cycles, E31 - Price Level; Inflation; Deflation, and E52 - Monetary Policy