Prudential authorities mandate that banks hold equity capital exceeding a share of their risk-weighted assets. How should policymakers design this central tool of financial regulation? We develop a unifying framework for nonlinear bank capital regulation that nests canonical models of financial intermediation. Using a perturbation approach, we characterize the positive and normative effects of reforming risk weights through a small set of sufficient statistics, including credit-supply elasticities and welfare externalities from financial intermediation. These statistics are informative about credit-market frictions and the degree of competition. We estimate them in administrative data and apply the framework to evaluate the Federal Reserve’s recent proposal to flatten the risk-weight schedule. Our analysis reveals nonlinear effects on credit allocation, leading to a moderate decline in total credit supply but a rise in bank equity, enhancing financial stability. Finally, we derive new sufficient-statistics formulas for the (constrained) Pareto-optimal risk weights that correct credit-supply externalities while accommodating market imperfections. Calibrated to empirical moments, the optimal schedule balances efficiency gains in production against the risk externalities of credit supply arising from government guarantees. Numerical simulations indicate that the Fed’s proposed weights are close to optimal, generating sizable welfare gains for households at the expense of banks and entrepreneurs.

Wealthy households obtain higher return rates than poorer ones due to a causal relationship between savings and their returns. How should the tax system account for this scale dependence? I study labor and capital income taxation under scale-dependent return rates. Although scale dependence amplifies observed income disparities, it can justify lower optimal taxes by increasing the efficiency costs of taxation. The mechanism behind this result is a multiplier effect between savings and pre-tax return rates. This effect magnifies conventional measures of savings responses and calls for an adjustment to estimated tax elasticities. To assess the policy relevance of the multiplier effect, I derive the nonlinear incidence of tax reforms in terms of sufficient statistics and estimate the multiplier using panel data on U.S. households and foundations. In the calibrated model, scale dependence amplifies the revenue losses from behavioral responses to labor and capital income taxation in a regressive way. Finally, I characterize optimal capital and labor income taxes in terms of scale dependence and show that the policy implications of scale dependence are quantitatively important.

We study the impact of unilateral economic disintegration, such as Brexit, on national and international policies. We introduce firm mobility and business-tax policies into a general-equilibrium trade model and analyze the effects of disintegration on tax policies of asymmetric countries. Whereas the disintegrating country taxes less, business taxes converge in the remaining economic area. We highlight important differences with existing two-country models. Moreover, we predict a realignment of trade policies with a deeper integration inside the union and lower tariffs worldwide. The leaving country's endogenous integration response with other countries may fully compensate for the disintegration-induced welfare losses.

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Economic disruptions generally create winners and losers. The compensation problem consists of designing a reform of the existing income tax system that offsets the welfare losses of the latter by redistributing the gains of the former. We derive a formula for the compensating tax reform and its impact on the government budget when only distortionary tax instruments are available and wages are determined endogenously in general equilibrium. We apply this result to the compensation of robotization in the U.S.

Migration and general equilibrium forces are both known to limit the extent of redistribution due to a migration threat and a trickle-down rationale, respectively. In this paper, we consider these two forces jointly and study the optimal nonlinear taxation of internationally mobile workers in general equilibrium. We show that both forces partly offset each other. In general equilibrium, migration may lower the bottom tax rate but raises the top tax rate, challenging the classical migration-threat argument. Moreover, we demonstrate that migration responses weaken the trickle-down rationale. Both findings can be explained by a novel wage effect on migration and a migration effect on wages, calling for higher top tax rates to amplify pre-tax wage inequality and prevent high-skilled emigration. We calibrate our model to the U.S. economy and illustrate the new effects by comparing the optimal tax schemes with and without migration, as well as with and without endogeneity of wages.