We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. The top of the model Laffer curve occurs at a 53 percent top tax rate. Tax revenues and the tax rate at the top of the Laffer curve are smaller compared to an otherwise similar model that ignores the possibility of skill change in response to a tax reform. We also show that if one applies the methods used by Diamond and Saez (2011) to provide quantitative guidance for setting the tax rate on top earners to model data then the resulting tax rate exceeds the tax rate at the top of the model Laffer curve. Press commentary: Xsede, NEP-DGE, Forbes.
Why has the U.S. black/white earnings gap remained around 40 percent for nearly 40 years? I provide a model of skill accumulation and neighborhood formation featuring a trap: Initial racial inequality and racial preferences induce racial segregation and asymmetric skill accumulation choices that perpetuate racial inequality. Calibrated to match the U.S. distribution of race, house prices and earnings across neighborhoods, the model produces one-half of the observed racial earnings gap. Moving the economy from the trap to a racially integrated steady state implies a 15.6 percent welfare gain for black households and a 2.7 percent loss for white households.
Publications / Forthcoming
The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve (with Mark Huggett, Journal of Monetary Economics)
A formula for the revenue maximizing top tax rate is derived as a function of three elasticities. The formula applies to static models and to steady states of dynamic models and is relevant for the top tax rate on any component of income. The formula is applied to several classic models. The application of the formula is also illustrated using a quantitative human capital model.
The life-cycle patterns of consumption, wage and hours inequality observed in U.S. cross-section data are commonly viewed as incompatible with a Pareto efficient allocation. Are these patterns consistent with Pareto efficiency in a model with preference shocks, wage shocks and full information? We determine the extent to which the qualitative and quantitative patterns can or cannot be produced by Pareto efficient allocations in such models. CODES
We employ quantile regression with selection correction and Machado-Mata decompositions to examine the degree to which the observed small differences in the distribution of observable characteristics can explain the gender gap in Colombia. We claim that Colombian women experience both a “glass ceiling effect’’ and also (what we call) a “quicksand floor effect” because gender differences in returns to characteristics primarily affect women at the top and the bottom of the distribution. Also, self selection into the labor force is crucial for gender gaps: if all women participated in the labor force, the observed gap would be roughly 50% larger at all quantiles. Press coverage: BBC, Espectador.
Work in Progress
We document a common set of life-cycle earnings facts using data from the US, Canada, Denmark and Sweden. In each country, we find that (1) the earnings distribution fans out with age, (2) the right tail of the earnings distribution becomes thicker with age, (3) the wage-rate distribution fans out with age and (4) the real earnings growth rate over the working lifetime is larger for higher lifetime earners. Quantitative models of top earners should account for Facts (1)-(4) and, importantly, for how they differ across countries.
St. Louis Fed Review Publications
This article highlights two approaches to tax policy for the top 1 percent of earners. On the one hand are dynamic general equilibrium models requiring complicated calibration and simulation algorithms and strong structural assumptions. On the other hand is the sufficient statistic approach, which attempts to parsimoniously reach the trinity of empirical, theoretical, and policy relevance. The author illustrates ongoing work highlighting explicit connections between these two approaches.
Representative Neighborhoods of the United States (Federal Reserve Bank of St. Louis Review, Second Quarter 2014)Racial segregation within metropolitan areas, and significant differences in average earnings and housing prices across neighborhoods are striking characteristics of metropolitan US. This paper applies off-the-shelf clustering methods to summarize the complexity of US neighborhood-level data.
Publications In Spanish
Este trabajo presenta evidencia según la cual la crisis reciente del sector hipotecario en Colombia fue consecuencia del incremento en la relación entre el
saldo de los créditos y el valor de las garantías (LTV o loan-to-value ratio) que aumentó la vulnerabilidad de los hogares al ciclo económico.
En este trabajo se desarrolla una versión del modelo de Kiyotaki y Moore (1997) donde choques al financiamiento internacional generan fluctuaciones persistentes en los precios de los activos y el producto. Con base en este modelo, se analizan las fluctuaciones macroeconómicas experimentadas por Colombia durante la década del noventa. En particular, se busca una teoría que pueda explicar de manera coherente tres elementos fundamentales: las fluctuaciones en el precio de los activos, el comportamiento de crédito y la recesión, a partir de choques exógenos pequeños al financiamiento internacional.
En este trabajo se realiza una estimación de la Eficiencia X para una muestra trimestral, entre marzo de 1998 y diciembre de 2000, para 54 bancos latinoamericanos. Las limitaciones de información hacen de este un ejercicio exploratorio, en el cual sólo se incluyen dos países además de Colombia (México y Costa Rica). Sin embargo, constituye el primer intento por realizar una comparación de Eficiencia X a nivel internacional para países latinoamericanos.
Predicting the Impact of Oil Prices on Inflation (Oct.2015, On the Economy Blog, with J. McGillicuddy)
Inflation decline opens regional inflation differentials (Oct.2015, Fred Blog, with J. McGillicuddy)Where in the Map Is Low Inflation Coming from? (Oct.2015, On the Economy Blog, with J. McGilliCuddy)Oil Prices and Inflation Expectations: Is There a Link? (Jul.2015, Regional Economist, with J. McGillicuddy)Oil Prices: Is Supply or Demand behind the Slump (May.2015, Economic Synopsis, with J. McGillicuddy) CODE_AND_DATAEconomic Mobility across Federal Reserve Districts (Feb.2015, On the Economy Blog)The Effect of Recent ECB Policy on Inflation Expectations (Feb.2015, On the Economy Blog, with J. McGillicuddy)Oil Prices: Is Supply or Demand behind the Slump (Jan.2015, with J. McGillicuddy)Recent ECB Policy and Inflation Expectations (Nov.2014, Economic Synopses, with J. McGillicuddy)Recent ECB Policy and Inflation Expectations (Aug.2014, On the Economy Blog, with J. McGillicuddy)Why Is Economic Mobility in Memphis among the Lowest in the Nation (Jul.2014, Regional Economist, with Julia Maues)Higher Taxes for Top Earners: Can They Really Increase Revenue? (Oct.2013, Regional Economist)Exploring the Link between Drug Use and Job Status in the U.S. (Jul.2013, Regional Economist, with B. Greaney)Black/White Segregation in the Eighth District: A Look at the Dynamics (Jul.2011, Regional Economist, with C. Martinek)
Should real estate prices be falling more in the Eighth District? (Jul.2010, Regional Economist, with C. Martinek)