1. “Laffer Curves Are Flat” with Brandon Pecoraro and David Splinter
Abstract: The Laffer curve peaks at the revenue-maximizing top tax rate, where revenue losses from behavioral responses offset revenue gains from a higher tax rate. Prior studies, however, largely overlook the Laffer curve’s shape, rely on simplified tax functions, and often omit shifting across business types and tax interactions. We show that modeling distinct tax bases more accurately and incorporating these interactions lowers the revenue-maximizing top tax rate and the associated revenue gains, yielding “flat” Laffer curves. Over this flat region, increasing the top tax rate raises relatively little revenue. Instead, raising top rates primarily trades off between progressivity and growth.
2. “Tax Policy and Retirement Saving: A Lifecycle Perspective” with Brandon Pecoraro
Abstract: Individuals in the U.S. may save for old age through tax-advantaged investment vehicles by contributing either pre-tax dollars into a traditional retirement account, or after-tax dollars into a Roth retirement account. Because the contribution basis differs across each account type, a model of optimal retirement wealth allocation must take care to account for interaction with the underlying income tax system. To analyze this interaction, we develop a structural lifecycle model with rich tax detail that allows for heterogeneous households to endogenously allocate their wealth across three types of investment vehicles: a traditional retirement account, a Roth retirement account, and a taxable return-bearing savings account. Contemporaneous availability of both traditional and Roth retirement accounts is a modeling innovation that enables us to account for the fact that some households simultaneously hold retirement wealth in both accounts, and to analyze how households optimally change their wealth allocation in response to changes in federal retirement and/or tax policy. We use this model to show that household heterogeneity in the expected path of lifetime income, tax filing status, bequest motives, and defined-benefit pensions can cause households to choose a mix of contributions to both traditional and Roth accounts over their working life. We contrast the model's implications for the elimination of traditional or Roth accounts, each in turn, on the average household's lifecycle paths of wealth, consumption and tax payments.
1. “Quantitative Analysis of a Wealth Tax in the United States: Exclusions, Evasion, and Expenditures” with Brandon Pecoraro, Journal of Macroeconomics, Volume 78, December 2023.
Abstract: Macroeconomic analyses of wealth taxes typically treat all household wealth as taxable, despite noted administrative difficulties with including owner-occupied housing and noncorporate equity in the tax base. In this paper, we quantify the macroeconomic and budgetary impact of avoidance due to these exclusions from a stylized, broad-based, top-wealth tax in the United States. We use a two-sector, large-scale overlapping generations model where, in the presence of exclusions, avoidance behavior arises endogenously through households’ reallocation of wealth and firms’ reallocation of economic activity. We find that while the macroeconomic and budgetary effects of the housing exclusion are insignificant, the noncorporate equity exclusion introduces a production-level distortion that results in a significant reallocation of economic activity from the corporate to noncorporate sector. We show that the federal revenue loss due to legal avoidance in the latter case can be similar to the amount lost due to illegal evasion via under-reporting wealth, but nonetheless have a quantitatively distinct path of macroeconomic aggregates. Finally, because interest in a wealth tax is linked to its potential for financing federal outlays, we show how variation in macroeconomic and budgetary effects across alternative expenditures affects the amount of new outlays availed by the tax itself. We find that while dedicating new revenue to public infrastructure investment leads to the largest increase in aggregate output, dedicating new revenue to federal debt reduction leads to the largest increase in outlays.
2. “A Tale of Two Bases: Progressive Taxation of Capital and Labor Income'' with Brandon Pecoraro, Public Finance Review, Volume 49, No. 3, pp: 335-391, May 2021.
Abstract: Macroeconomic models used for tax policy analysis routinely abstract from two features of the US federal tax code for household income: the joint taxation of ordinary capital and labor income at ordinary rates, and the special taxation of preferential capital income at low rates. In this paper we argue that this abstraction omits a `portfolio-effect' mechanism where, under a progressive income tax system, endogenous changes to the ordinary-preferential composition of households' capital income influence individuals' optimal labor and saving decisions through its impact on their effective marginal tax rates. We demonstrate the quantitative importance of modeling this tax detail using a two-sector, heterogeneous-agent overlapping generations framework to simulate two subsets of tax provisions from the “Tax Cuts and Jobs Act” of 2017. When accounting for the differential tax treatment of income flows within the model using an internal tax calculator, we show how household labor and savings behavior change consistently with the incentives created by the portfolio-effect. This behavior aggregates to drive deviations at the macroeconomic level. Consequentially, abstracting from this tax detail comes at the cost of omitting policy-induced household behavioral responses from the macroeconomic analysis.
Abstract: Analysis of fiscal policy changes using general equilibrium models with forward-looking agents typically requires a counterfactual adjustment to some fiscal instrument in order to achieve the debt sustainability implied by the government's intertemporal budget constraint. The choice of fiscal instrument can induce economic behavior unrelated to the policy change in models where Ricardian Equivalence does not hold. In this paper we use an overlapping generations framework to examine the effects of alternative fiscal closing assumptions on projected changes to economic aggregates following a change in tax policy, assessing the extent to which the bias associated with a particular fiscal instrument can be mitigated. While we find quantitative differences in projected macroeconomic activity across alternative fiscal instruments, these differences tend to shrink as the closing date is delayed. Ultimately, the choice of fiscal instrument becomes relatively unimportant if fiscal closing can be delayed sufficiently into the future.
4. “Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework" with Brandon Pecoraro, Economic Modelling, Volume 87, pp. 72-91, April 2020.
Abstract: Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate complex present tax law and proposed reforms. In this paper, we explore the extent to which the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. To do this, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that, while conditioning on idiosyncratic household characteristics, explicitly models key provisions in the Internal Revenue Code applied to labor income. We find that for a comparative-static steady state analysis of a given tax policy change, both approaches generate similar policy-induced patterns of macroeconomic activity despite variation in the underlying patterns of household tax-preferred consumption and labor supply behavior. However, this variation in underlying behavior is associated with significant quantitative and qualitative differences in macroeconomic aggregates along the transition path immediately following a policy change. Consequentially, although the use of unconditional smooth tax functions may be a reasonable modeling simplification for steady state analysis of tax policy, caution should be taken for their use in transition path analysis within heterogeneous-agent models.
Abstract: In this paper we evaluate the effects of a reduction in Social Security’s Old-Age and Survivors Insurance (OASI) benefits using seven different quantitative general equilibrium overlapping generations (OLG) models. We compare the effects of an anticipated one-third reduction in OASI benefits in 2031 on an economy that maintains currently scheduled benefits. We find many of the models generate qualitatively similar results concerning macroeconomic aggregates; however, the magnitude of the effects vary due to the models’ structure and calibration strategies.
Abstract: The macroeconomic effects of tax reform are a subject of significant discussion and controversy. In 2015, the House of Representatives adopted a new “dynamic scoring” rule requiring a point estimate within the budget window of the deficit effect due to the macroeconomic response to certain proposed tax legislation. The revenue estimates provided by the staff of the Joint Committee on Taxation (JCT) for major tax bills often play a critical role in Congressional deliberations and public discussion of those bills. The JCT has long had macroeconomic analytic capability, and in recent years, responding to Congress’ interest in macrodynamic estimates for purposes of scoring legislation, outside think tank groups — notably the Tax Policy Center and the Tax Foundation — have also developed macrodynamic estimation models. The May 2017 National Tax Association (NTA) Spring Symposium brought together the JCT with the Tax Foundation and the Tax Policy Center for a panel discussion regarding their respective macrodynamic estimating approaches. This paper reports on that discussion. Below each organization provides a general description of their macrodynamic modeling methodology and answers five questions posed by the convening authors.