Research

We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporation to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted acess to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.

We study the welfare effects of both existing and counter-factual European unemployment insurance (UI) policies using a rich multi-country dynamic general equilibrium model with labour market frictions. The model successfully replicates several salient features of European labour markets, in particular the cross-country differences in the flows between employment, unemployment and inactivity, as a result of labour market and UI policy differences across euro area countries. We find that mechanisms like the recently introduced instrument  for temporary support to mitigate unemployment risks in an emergency (SURE), which allows national governments to borrow at low interest rates to cover expenditures on unemployment risks, yield sizeable welfare gains. Furthermore, we find that, in spite of the calibrated heterogeneity acros euro area countries, there is a common direction in which they can improve their UI policies; in particular, a harmonized benefit system that features a one-time payment of around three quarters of income upon separation is welfare improving in all euro area countries relative to the status quo.

The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to a change in the distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through higher labor supply of (non-)heirs.

Linking data from the National Longitudinal Survey of Youth 1979 (NLSY79) and the NLSY79 Children and Young Adults we document a substantial positive correlation of employment status between mothers and their children in the United States. After controlling for ability, education, fertility and wealth, offspring of permanently employed mothers have an 11 percentage-point higher probability to be employed in each given year than those of never employed mothers. The intergenerational transmission of maternal employment is stronger to daughters but significant also to sons. Investigating potential mechanisms, we provide suggestive evidence for a role model channel, through which labor force participation may be transmitted. Offspring seem to emulate the example of their mother when they observe her working. By contrast, we are able to rule out several alternative explainations such as network effects, occupation-specific human capital and local conditions of the labor market.

I derive a robust condition for the optimality of capital income tax rates that holds across a battery of benchmark macroeconomic models. Applying my theoretical results to US data and disciplining the tax elasticity of wealth with recent quasi-experimental evidence, I find high optimal Rawlsian tax rates of about 90%, because capital tax increases raise the gross return on capital, mitigating the excess burden. At the same time, captial tax hikes depress wages, resulting in lower optimal tax rates from the perspective of households with substantial labor income, the status quo being optimal for households around the 70th income percentile.