Research

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"Are Consumption Taxes Really Better Than Labour Income Taxes? Theoretical and Quantitative Implications of the Choice of Tax Base"

Abstract: In many standard economic models, taxes on labour earnings and taxes on consumption are outcome-equivalent. However, this is not the case when taxes are non-linear and households differ with respect to wages and earnings, which is the case considered in this paper. I study the differences between the two tax regimes using a tractable two-period framework and show that the theoretical advantages of consumption taxation are twofold. First, it eliminates an intertemporal distortion on labour supply. Second, consumption is more strongly correlated with lifetime resources, which matters for the distributional impact of the tax system. To assess the quantitative implications of the choice of tax base, I construct a standard overlapping generations model with incomplete markets. After calibrating the model to the U.S. economy, I replace a progressive labour income tax with a progressive consumption tax, taking into account post-reform transition dynamics. This reform produces non-trivial gains in output, consumption and welfare. Most of the benefits stem from improvements in labour efficiency that follow from the mitigation of distortions on work decisions.

Link: You can find a PDF of the paper here.

Works in Progress

"Asset Liquidity and Intertemporal Preferences"

In this paper, I construct a dynamic model of savings behavior, where agents have access to two types of assets—a liquid asset (e.g. cash) and an illiquid asset (e.g. retirement funds). The presence of two savings options allows for a cleaner distinction between precautionary motives and life-cycle motives. Households build buffer stocks of liquid savings in order to self-insure against income fluctuations but save for retirement with illiquid savings in order to exploit higher long-run rates of return. Illiquid savings are not desirable for self-insurance against shocks because early withdrawals are penalized. Without this feature of the model, it is difficult to separately identify patience from risk aversion. In order to solve the model with feasible computational expense, I develop an extension of the endogenous grid method for models with two continuous state variables. Estimation using data from the NLSY (National Longitudinal Survey of Youth) is pending.

"Identifying Heterogeneity and Uncertainty Using Housing Choices"

There is some debate about whether the evolution of earnings over the life cycle is better described by the heterogeneous income profile (HIP) model, which allows for dispersion of individual returns to experience, or the restricted income profile (RIP) model, which does not. Distinguishing between the two models is a tricky empirical exercise, especially when using only income data. The exercise is eased if we can complement income data with data about economic decisions. This paper aims to solve the problem by using the information contained in housing choices. I construct a life-cycle model in which households make savings and housing decisions in the presence of several financial frictions and discipline it with data from the Panel Study of Income Dynamics (PSID). Simulation results indicate that the heterogeneity in the slope and shape of the earnings profile helps rationalize various features of the joint dynamics of income and housing.

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