Research Database

This note shows that basic theorems of dynamic programming hold when the return function is homogeneous of degree theta <= 1.

We revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to key issues that we believe are critical for an informed discussion about changing inequality since 1980: the definition of income (labor versus total), the unit of analysis (individual versus tax unit), the importance of partnership and S-corporation income, income shifting between the corporate and personal sectors in response to tax incentives, the definition of the top of the distribution, and trends in the middle and bottom of the distribution. Our goal is to inform researchers, policymakers, and journalists who are interested in top income inequality.

This paper develops a model of competitive economy which is used to study the effect that distortionary taxes have on the business cycle and on agents’ welfare. In the presence of distortions, the equilibria are not Pareto optimal and standard computational techniques cannot be used. Instead, methods that take into account the presence of distorting taxes are applied. Maximum likelihood estimates of taste, technology and policy parameters from U.S. post-war time series are used to obtain several results. I find that a significant portion of the variance of the aggregate consumption, output, hours worked, capital stock, and investment can be attributed to the factor tax and government spending processes. Also, I compute the deadweight loss due to alternative tax changes and compare these estimates to others in the literature. Specification of taxes as constant versus state-contingent can have a significant effect on the results.