Abstract : We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balanced-budget constraint. By contrast with its non-budget neutral equivalent - associated with a constant tax rate over time and a permanent increase in the level of public debt - we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.

Keywords : Fiscal Policy, Capital Tax Cut, Tax Composition, Heterogeneous Agents, Wealth Redistribution.

JEL Codes : E21, E6, D31, H23.

Abstract : Interactions and coordination between fiscal and monetary policies play a crucial role in effectively designing policy interventions, particularly those involving redistribution. Given persistent high levels of debt, unemployment, and increasing inequality, understanding the dynamics of income and wealth distributions is vital for assessing the coordination of fiscal and monetary policies. To address these distributional concerns, this study examines the welfare-maximizing fiscal response to a monetary shock using a HANK model with search and matching frictions calibrated on US data. The main findings reveal that the most welfare-enhancing response involves reducing labor income taxation. Despite potential negative impacts on the labor market, this approach generates an overall positive macroeconomic expansion while providing some redistribution toward wealth-poor households. However, it entails a significant trade-off between increased inequality and higher unemployment. Furthermore, it diminishes the effectiveness of a potential unemployment-centric monetary policy.  

Keywords: Fiscal Policy, Monetary Policy, Inequality, Heterogeneous Agents

JEL Codes: E21; E62;E52

Abstract :

How do changes in the tax composition, to finance a labor tax cut, affect aggregate variables, wealth distribution, and welfare?  In this paper, we evaluate a French experiment. Using a heterogeneous agents framework with search and matching, we find that the effect of the labor tax reduction on the macroeconomic variables depends on the tax instrument chosen to finance it. Financing it with a capital tax rise leads to a short-run increase in production and consumption but a long-run recession. However, consumption tax funding causes a permanent expansion. The rise of unemployment leads, to already employed individuals, to desire to work more and firms do not need to pay a search cost to create new jobs. As the unemployment rate increases, households' precautionary savings close to the borrowing constraint increases. Wealth inequalities are reduced and average welfare improves with both reforms. However, financing the labor tax cut with the capital tax leads to higher welfare gains than financing it with the consumption tax, despite a smaller reduction in wealth inequality.

Keywords :  Fiscal Policy, Heterogeneous Agents, Wealth Redistribution

JEL Code:  E21, E62, D3, H23

Abstract :

This paper investigates the trade-off between the reduction of informality and inequality while taking into account gender-based disparities in the context of the Brazilian economy using a heterogeneous entrepreneurship and financial frictions model with an informal sector. Several experiments are conducted to assess the impact of reducing the size of the informal sector, the potential trade-off between wealth and gender inequality redistribution, and the role played by different tax instruments. Results show that a reduction in informality provokes an increase in aggregate output, while reducing consumption, but leads to an increase in wealth and gender inequality. However, fiscal policies optimally designed to maximize welfare emphasize that achieving a substantial reduction in the share of individuals operating in the informal while lowering both wealth and gender inequality can only be achieved through a profit tax of 27.5%. Moreover, I show that neglecting the role of gender-based discrimination can lead to wrongly designing optimal fiscal policies.

Keywords:  Fiscal Policy, Entrepreneurship, Informality, Inequality, Gender Discrimination, Heterogeneous Agents

JEL Code:  E21, E26, E44, H26, J16