Optimal Fiscal Policy with Preference Heterogeneity (September 2024, submitted)
This paper studies optimal fiscal policy in a dynamic economy with aggregate shocks, where agents are heterogeneous in their incomes, preferences toward risk, and the intertemporal elasticity of substitution. I show that i) if low-income people have lower intertemporal elasticity of substitution or higher risk aversion, the optimal marginal tax rates are procyclical, and transfers are countercyclical; ii) optimal marginal tax rates increase by about 2.2 percentage points for each percentage increase in productivity, and iii) US marginal tax rate fluctuations were close to optimal before 1980, but not much after that because they turned countercyclical.
The results are due to preference heterogeneity, which leads to procyclical fluctuations in the implicit price of the informational rent of the agents across time and states and, in turn, to fluctuations in marginal taxes and transfers.
History Dependent Income Taxation in an Overlapping Generations Economy (July 2020, submitted)
I show that a history dependent income tax is welfare improving in an incomplete markets OLG economy because it allows to transfer consumption insurance across cohorts. The egalitarian government chooses higher progressivity with respect to past incomes and reduces progresssivity with respect to the current income. This increases consumption insurance at higher age and for older cohorts, but reduces it for lower age and younger cohorts. I also show that history dependence is fundamentally different from age dependence.
The welfare gains from full history dependence are large, about 2.5 percent of consumption. Limited history dependence produces sizeable gains too: a tax that depends on 5 past incomes captures about half of the potential gains.
Quantifying the Welfare Gains from History Dependent Income Taxation (January 2020, R&R JPE)
I quantify the welfare gains from introducing history dependent income tax in an incomplete markets framework where individuals face uninsurable idiosyncratic shocks. I assume that taxes paid are a function of a geometrically weighted average of past incomes, and solve for the optimal weights. I find that the three main factors that determine the nature of history dependence are the degree of mean reversion in the productivity process, the discount factor, and relative weights of the underlying shocks.
The welfare gains from history dependence itself are between 1.72 and 2.98 percent of consumption, depending on whether one starts with the best history independent system or the current U.S. tax system. I decompose the total effect into an efficiency effect that reduces distortion of labor supply, and an insurance effect that reduces volatility of consumption. Quantitatively, the insurance effect strongly dominates the efficiency effect.
Pareto Efficient Income Taxation with Learning by Doing (September 2020, submitted)
I study the Pareto efficient income taxation in a dynamic learning-by-doing economy. I derive a simple tax formula that determines the intertemporal profile of marginal income taxes in any efficient allocation and depends only on how hours worked interact with current, past and future information rents.
I contrast the optimal marginal income taxes under learning-by-doing and under learning-or-doing. I parameterize the model for the U.S. economy and show that the optimal marginal tax rates decrease with age in both cases. While in the learning-by-doing economy this is mainly due to the effects on the current information rent, the effects on past and future information rents in the learning-or-doing economy.
Exploring The Role of Limited Commitment Constraints in Argentina's "Missing Capital" (with Finn Kydland and Carlos Zarazaga, January 2020, submitted. Also as a NBER WP )
We study why capital accumulation in Argentina was slow in the 1990s and 2000s, despite high productivity growth and low international interest rates. We show that limited commitment constraints introduce two mechanisms. First, the response of investment to a total factor productivity increase is muted and short-lived, while the response to a decrease is large and persistent. Second, unlike in a first-best economy, low international interest rates may reduce capital accumulation, because they increase the relevance of future commitment constraints.
A quantitative implementation of the model economy shows that the two mechanisms are quantitatively important for the dynamics of Argentina's capital accumulation. The model accounts for between 50% and 85% of the capital missing from Argentina in these two periods, relative to what it would be in the absence of the limited commitment frictions.
Organization of Knowledge and Taxation (with Ctirad Slavík, August 2022, R&R International Economic Review)
This paper studies how income taxation interacts with the organization of knowledge and production, and ultimately the distribution of wages in the economy. A more progressive tax system reduces the time that managers allocate to work. This makes the organization of production less efficient and reduces wages at both tails of the distribution, which increases lower tail wage inequality and decreases upper tail wage inequality. The optimal tax system is only modestly more progressive than the current one in the United States. However, the optimal tax progressivity is substantially smaller than if the wage structure was exogenous.
Tertiary Educational Choices: United States versus Europe (with Radim Boháček, January 2016, R&R European Economic Review)
We study whether differences in productivity in the tertiary education sector and differences in educational and tax policies can explain differences in educational outcomes in the United States and Europe, especially lower European tertiary attainment and lower tertiary earnings premium. We calibrate a general equilibrium model with heterogeneous agents and dynasties which allows for schooling choice at the tertiary level.
We find that high European schooling subsidies combined with significantly lower productivity of the tertiary sector can account for the observed differences. Tertiary sector productivity is quantitatively more important than educational subsidies, which can explain only 14-20 percent of differences in tertiary attainment. On the other hand, higher educational subsidies relax credit constraints and lead to a more efficient allocation of skills at the tertiary level. The allocation of skills is, however, quite close to the first-best allocation of skills in both the United States and Europe. Finally, we consider several policy reforms that show that educational subsidies and tax policies only have a small impact on aggregate educational outcomes, but have important distributional consequences.
Why do Europeans steal more than Americans? (with Christine Braun and Peter Rupert, December 2017)
Property crime is today more widespread in Europe than in the United States, while the opposite was true during the 1970s and 1980s. In this paper, we study the determinants of crime in a dynamic general equilibrium labor and crime search model. We focus on the United States and the United Kingdom and compute the contribution of various factors to the total change. We find that changes in the probability of apprehension and prison duration increased crime rates for both countries. At the same time, changes in the job finding and job separation rates decreased the crime rate in the United States but increased it in the United Kingdom. Changes in the unemployment insurance rates and age distribution also contributed to the reversal.
Labor Markets during Pandemics (with Peter Rupert, July 2022, Journal of Economic Theory)
Optimal Taxation with Risky Human Capital (with Julian Neira, American Economic Journal: Macroeconomics, 2019, 11(4): 271-309)
Consumption Risk Sharing with Private Information and Limited Enforcement (with Tobias Broer and Paul Klein, Review of Economic Dynamics, October 2016)
Optimal Mirrleesean Taxation in a Ben-Porath Economy (American Economic Journal: Macroeconomics: 2015, 7(2): 219–248)
Efficient Allocations in Dynamic Private Information Economies with Persistent Shocks: A First-Order Approach. The Review of Economic Studies 2013, 80(3): 1027-1054
How Important is Technology Capital for the United States? American Economic Journal: Macroeconomics 2012, 4(2): 218–248
Optimal human capital policies. (with Radim Boháček) Journal of Monetary Economics 2008, 55(1): 1-16
Optimal income taxation with human capital accumulation and limited record keeping. Review of Economic Dynamics 2006, 9(4): 612-639
last updated on September 3, 2020