Economics of Taxation: Theory and Policy

Transcription

1 Economics of Taxation: Theory and Policy Nicolas Werquin Toulouse School of Economics June 28, 2017 This class focuses on the economic theories of taxation and their policy implications. It is organized around three main topics. First, we present the canonical Mirrlees model of labor income taxation. From a theoretical point of view, we set up the model and derive its key qualitative implications for the optimal tax schedule. We further discuss various recent extensions of this benchmark model: e.g., general equilibrium, labor market participation decisions, joint labor supply choices within couples, rentseeking and superstar effects at the top of the income distribution. Along the way we present the main empirical methods to estimate the fundamental determinant of optimal taxes, namely the elasticity of labor supply, and conclude by discussing several policy recommendations. Second, we focus on the taxation of capital. We start by briefly reviewing the Ramsey model and deriving its implications. We then explore theoretically and numerically the properties of optimal capital taxes in Aiyagari-type models of exogenously incomplete markets, for various theories of wealth inequality. We finally endogenize market incompleteness by extending the Mirrlees framework to the dynamic and stochastic environment. The theory of dynamic contracts is a powerful tool that has applications to various macroeconomic questions beyond taxation. We explain how to solve analytically this class of models and show that it yields novel qualitative and quantitative insights for optimal taxes. Third, we move to optimal unemployment insurance. The theory of dynamic contracts can again be applied to this question and leads to a characterization of the optimal timing of benefits over the unemployment spell. We then expose the general Baily-Chetty theory of social insurance, based on a sufficient statistic approach. We next turn to frictional labor markets and characterize optimal policy in search and matching models à la Mortensen-Pissarides. Finally, if time permits and depending on the interest of the students, we discuss other miscellaneous topics, e.g.: the optimality of minimum wages in competitive and monopsonistic labor markets; optimal taxes shaped by political economy forces and by fairness considerations; fiscal multipliers over the business cycle. 1

2 Assignments and evaluation Each student will: (i) present one paper related to the material covered in the course; (ii) write either a referee report of a paper assigned in class, or a critical literature review based on several papers from the syllabus, or a short research paper on a topic related to those discussed in class. General references Pissarides, C.A., Equilibrium unemployment theory. MIT press. Salanié, B., The economics of contracts: a primer. MIT press. Salanié, B., The economics of taxation. MIT press. Mirrlees, J.A. and Adam, S., Dimensions of tax design: the Mirrlees review, and Tax by design: The Mirrlees review (Vol. 2). Oxford University Press. Ljungqvist, L. and Sargent, T.J., Recursive macroeconomic theory. MIT press. Atkinson, A.B. and Stiglitz, J.E., Lectures on public economics. Princeton University Press. The highlighted articles are required reading. The other articles are for reference and will be partially covered in class. This syllabus is subject to minor or major changes during the semester. 1 Optimal labor income taxation Mirrlees, J.A., An exploration in the theory of optimum income taxation. The Review of Economic Studies, 38(2), pp Varian, H.R., Redistributive taxation as social insurance. Journal of public Economics, 14(1), pp Stiglitz, J.E., Self-selection and Pareto efficient taxation. Journal of Public Economics, 17(2), pp Stiglitz, J.E., Pareto efficient and optimal taxation and the new new welfare economics. Handbook of public economics, 2, pp Diamond, P.A., Optimal income taxation: an example with a U-shaped pattern of optimal marginal tax rates. American Economic Review, pp Saez, E., Using elasticities to derive optimal income tax rates. The Review of Economic Studies, 68(1), pp

3 Saez, E., Direct or indirect tax instruments for redistribution: short-run versus long-run. Journal of Public Economics, 88(3), pp Werning, I., Pareto Efficient Income Taxation. Kleven, H.J., Kreiner, C.T. and Saez, E., Econometrica, 77(2), pp The optimal income taxation of couples. Diamond, P. and Saez, E., The case for a progressive tax: from basic research to policy recommendations. The Journal of Economic Perspectives, 25(4), pp Piketty, T. and Saez, E., Optimal labor income taxation (No. w18521). National Bureau of Economic Research. Rothschild, C. and Scheuer, F., Redistributive Taxation in the Roy Model. The Quarterly journal of economics, 128(2), pp Rothschild, C. and Scheuer, F., A theory of income taxation under multidimensional skill heterogeneity (No. w19822). National Bureau of Economic Research. Piketty, T., Saez, E. and Stantcheva, S., Optimal taxation of top labor incomes: A tale of three elasticities. American economic journal: economic policy, 6(1), pp Lehmann, E., Simula, L. and Trannoy, A., Tax Me if You Can: Optimal Income Tax Competition between Competing Governments. Quarterly Journal of Economics (forthcoming). Scheuer, F., Entrepreneurial taxation with endogenous entry. American Economic Journal: Economic Policy, 6(2), pp Gomes, R.D., Lozachmeur, J.M. and Pavan, A., Differential taxation and occupational choice. Heathcote, J., Storesletten, K. and Violante, G.L., Optimal tax progressivity: An analytical framework (No. w19899). National Bureau of Economic Research. Farhi, E. and Gabaix, X., Optimal taxation with behavioral agents (No. w21524). National Bureau of Economic Research. Cremer, H., Lozachmeur, J.M., Maldonado, D. and Roeder, K., Household bargaining and the design of couples income taxation. Scheuer, F. and Werning, I., The taxation of superstars (No. w21323). National Bureau of Economic Research. 3

4 Ales, L., Kurnaz, M. and Sleet, C., Technical change, wage inequality, and taxes. The American Economic Review, 105(10), pp Ales, L. and Sleet, C., Taxing Top CEO Incomes. American Economic Review, forthcoming. Rothschild, C. and Scheuer, F., Optimal taxation with rent-seeking. The Review of Economic Studies, p.rdw017. Saez, E. and Stantcheva, S., Generalized social marginal welfare weights for optimal tax theory. The American Economic Review, 106(1), pp Sachs, D., Tsyvinski, A. and Werquin, N., Non-linear tax incidence and optimal taxation in general equilibrium (No. w20780). National Bureau of Economic Research. Scheuer, F. and Werning, I., Mirrlees meets Diamond-Mirrlees (No. w22076). National Bureau of Economic Research. 2 Empirical estimation of the labor supply elasticity MaCurdy, T.E., An Empirical Model of Labor Supply in a Life-Cycle Setting. The Journal of Political Economy, pp MaCurdy, T.E., A simple scheme for estimating an intertemporal model of labor supply and consumption in the presence of taxes and uncertainty. International Economic Review, pp Hausman, J.A., Taxes and labor supply. Handbook of public economics, 1, pp Altonji, J.G., Intertemporal substitution in labor supply: Evidence from micro data. The Journal of Political Economy, pp.s176-s215. Rogerson, R., Indivisible labor, lotteries and equilibrium. Journal of monetary Economics, 21(1), pp Eissa, N. and Liebman, J.B., Labor Supply Response to the Earned Income Tax Credit. The Quarterly Journal of Economics, 111(2), pp Blundell, R., Duncan, A. and Meghir, C., Estimating labor supply responses using tax reforms. Econometrica, pp Blundell, R. and MaCurdy, T., Labor supply: A review of alternative approaches. Handbook of labor economics, 3, pp

5 Goolsbee, A., What Happens When You Tax the Rich? Evidence from Executive Compensation. The Journal of Political Economy, 108(2), pp Gruber, J. and Saez, E., The elasticity of taxable income: evidence and implications. Journal of public Economics, 84(1), pp Moffitt, R.A., Welfare programs and labor supply. Handbook of public economics, 4, pp Prescott, E.C., Why Do Americans Work So Much More Than Europeans?. Federal Reserve Bank of Minneapolis Quarterly Review, 28(1), pp Farber, H.S., Is tomorrow another day? The labor supply of New York City cabdrivers. Journal of political Economy, 113(1), pp Rogerson, R. and Wallenius, J., Micro and macro elasticities in a life cycle model with taxes. Journal of Economic theory, 144(6), pp Chetty, R., Friedman, J.N., Olsen, T. and Pistaferri, L., Adjustment costs, firm responses, and micro vs. macro labor supply elasticities: Evidence from Danish tax records (No. w15617). National Bureau of Economic Research. Saez, E., Do taxpayers bunch at kink points?. American Economic Journal: Economic Policy, 2(3), pp Meghir, C. and Phillips, D., Labour supply and taxes. Dimensions of tax design: The Mirrlees review, pp Saez, E., Slemrod, J. and Giertz, S.H., The elasticity of taxable income with respect to marginal tax rates: A critical review. Journal of economic literature, 50(1), pp Keane, M. and Rogerson, R., Micro and macro labor supply elasticities: A reassessment of conventional wisdom. Journal of Economic Literature, 50(2), pp Chetty, R., Bounds on elasticities with optimization frictions: A synthesis of micro and macro evidence on labor supply. Econometrica, 80(3), pp Chetty, R., Guren, A., Manoli, D. and Weber, A., Does indivisible labor explain the difference between micro and macro elasticities? A meta-analysis of extensive margin elasticities. In NBER Macroeconomics Annual 2012, Volume 27 (pp. 1-56). University of Chicago Press. 5

6 3 Optimal indirect and capital taxation Diamond, P.A. and Mirrlees, J.A., Optimal taxation and public production I: Production efficiency. The American Economic Review, 61(1), pp Diamond, P.A. and Mirrlees, J.A., Optimal taxation and public production II: Tax rules. The American Economic Review, 61(3), pp Diamond, P.A., A many-person Ramsey tax rule. Journal of Public Economics, 4(4), pp Atkinson, A.B. and Stiglitz, J.E., The design of tax structure: direct versus indirect taxation. Journal of public Economics, 6(1), pp Judd, K.L., Redistributive taxation in a simple perfect foresight model. Journal of public Economics, 28(1), pp Chamley, C., Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica: Journal of the Econometric Society, pp Chari, V.V. and Kehoe, P.J., Optimal fiscal and monetary policy. Handbook of macroeconomics, 1, pp Saez, E., The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes. Journal of Public Economics, 83(2), pp Golosov, M., Kocherlakota, N. and Tsyvinski, A., Optimal indirect and capital taxation. The Review of Economic Studies, 70(3), pp Castaneda, A., Díaz-Giménez, J. and Ríos-Rull, J.V., Accounting for the US earnings and wealth inequality. Journal of political Economy, 111(4), pp Kocherlakota, N.R., Wedges and taxes. The American Economic Review, 94(2), pp De Nardi, M., Wealth inequality and intergenerational links. The Review of Economic Studies, 71(3), pp Kocherlakota, N.R., Zero expected wealth taxes: A Mirrlees approach to dynamic optimal taxation. Econometrica, 73(5), pp Golosov, M. and Tsyvinski, A., Optimal taxation with endogenous insurance markets (No. w11185). National Bureau of Economic Research. Laroque, G.R., Indirect taxation is superfluous under separability and taste homogeneity: a simple proof. Economics Letters, 87(1), pp

7 Kaplow, L., On the undesirability of commodity taxation even when income taxation is not optimal. Journal of Public Economics, 90(6), pp Golosov, M. and Tsyvinski, A., Designing optimal disability insurance: A case for asset testing. Journal of Political Economy, 114(2), pp Albanesi, S. and Sleet, C., Dynamic optimal taxation with private information. The Review of Economic Studies, 73(1), pp Cagetti, M. and De Nardi, M., Entrepreneurship, frictions, and wealth. Journal of political Economy, 114(5), pp Albanesi, S., Optimal taxation of entrepreneurial capital with private information (No. w12419). National Bureau of Economic Research. Farhi, E. and Werning, I., Inequality and social discounting. Journal of political economy, 115(3), pp Werning, I., Optimal fiscal policy with redistribution. The Quarterly Journal of Economics, pp Farhi, E., Golosov, M. and Tsyvinski, A., A theory of liquidity and regulation of financial intermediation. The Review of Economic Studies, 76(3), pp Conesa, J.C., Kitao, S. and Krueger, D., Taxing capital? Not a bad idea after all!. The American economic review, 99(1), pp Cagetti, M. and De Nardi, M., Estate taxation, entrepreneurship, and wealth. The American Economic Review, 99(1), pp Krueger, D. and Perri, F., Public versus private risk sharing. Journal of Economic Theory, 146(3), pp Davila, J., Hong, J.H., Krusell, P. and Ríos-Rull, J.V., Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks. Econometrica, 80(6), pp Piketty, T. and Saez, E., A theory of optimal inheritance taxation. Econometrica, 81(5), pp Shourideh, A., Optimal taxation of wealthy individuals. In 2013 Meeting Papers (No. 261). Society for Economic Dynamics. Farhi, E. and Werning, I., Insurance and taxation over the life cycle. The Review of Economic Studies, 80(2), pp

8 Kindermann, F. and Krueger, D., High marginal tax rates on the top 1%? Lessons from a life cycle model with idiosyncratic income risk (No. w20601). National Bureau of Economic Research. Straub, L. and Werning, I., Positive Long Run Capital Taxation: Chamley- Judd Revisited (No. w20441). National Bureau of Economic Research. Golosov, M., Tsyvinski, A. and Werquin, N., A variational approach to the analysis of tax systems (No. w20780). National Bureau of Economic Research. Golosov, M. and Tsyvinski, A., Policy implications of dynamic public finance. Annual review of economics, 7(1), pp Stantcheva, S., Optimal taxation and human capital policies over the life cycle (No. w21207). National Bureau of Economic Research. Golosov, M., Troshkin, M. and Tsyvinski, A., Redistribution and social insurance. The American Economic Review, 106(2), pp Golosov, M., Tsyvinski, A. and Werquin, N., Recursive Contracts and Endogenously Incomplete Markets (No. w22012). National Bureau of Economic Research. Bhandari, A., Evans, D., Golosov, M. and Sargent, T.J., Fiscal Policy and Debt Management with Incomplete Markets. Quarterly Journal of Economics, forthcoming. 4 Labor market participation decisions and optimal unemployment insurance Baily, M.N., Some aspects of optimal unemployment insurance. Journal of Public Economics, 10(3), pp Guesnerie, R. and Roberts, K., Minimum wage legislation as a second best policy. European Economic Review, 31(1-2), pp Hopenhayn, H.A. and Nicolini, J.P., Optimal unemployment insurance. Journal of political economy, 105(2), pp Rochet, J.C. and Choné, P., Ironing, sweeping, and multidimensional screening. Econometrica, pp Acemoglu, D. and Shimer, R., Efficient unemployment insurance. Journal of Political, 8. Saez, E., Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses. Quarterly Journal of Economics, pp

9 Choné, P. and Laroque, G., Optimal incentives for labor force participation. Journal of Public Economics, 89(2), pp Hungerbühler, M., Lehmann, E., Parmentier, A. and Van der Linden, B., Optimal redistributive taxation in a search equilibrium model. The Review of Economic Studies, 73(3), pp Chetty, R., A general formula for the optimal level of social insurance. Journal of Public Economics, 90(10), pp Shimer, R. and Werning, I., Reservation Wages and Unemployment Insurance. The Quarterly Journal of Economics, 122(3), pp Shimer, R. and Werning, I., Liquidity and Insurance for the Unemployed. The American Economic Review, 98(5), pp Chetty, R., Moral Hazard versus Liquidity and Optimal Unemployment Insurance. Journal of Political Economy, 116(2), pp Chetty, R., Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods. Annu. Rev. Econ., 1(1), pp Chetty, R. and Saez, E., Optimal taxation and social insurance with endogenous private insurance. American Economic Journal: Economic Policy, 2(2), pp Choné, P. and Laroque, G., Optimal taxation in the extensive model. Journal of Economic Theory, 146(2), pp Blundell, R., Bozio, A. and Laroque, G., Labor Supply and the Extensive Margin. The American Economic Review, 101(3), pp Lehmann, E., Parmentier, A. and Van der Linden, B., Optimal income taxation with endogenous participation and search unemployment. Journal of Public Economics, 95(11), pp Lee, D. and Saez, E., Optimal minimum wage policy in competitive labor markets. Journal of Public Economics, 96(9), pp Golosov, M., Maziero, P. and Menzio, G., Taxation and redistribution of residual income inequality. Journal of Political Economy, 121(6), pp Chetty, R. and Finkelstein, A., Social Insurance: Connecting Theory to Data. Handbook of Public Economics, 5, p.111. Cahuc, P. and Laroque, G., Optimal taxation and monopsonistic labor market: does monopsony justify the minimum wage?. Journal of Public Economic Theory, 16(2), pp

10 Stantcheva, S., Optimal income taxation with adverse selection in the labour market. The Review of Economic Studies, 81(3), pp Lamadon, T., Productivity shocks, dynamic contracts and income uncertainty. In 2014 Meeting Papers (Vol. 243). Society for Economic Dynamics. Kolsrud, J., Landais, C., Nilsson, P. and Spinnewijn, J., The optimal timing of unemployment benefits: Theory and evidence from Sweden. Kroft, K., Kucko, K.J., Lehmann, E. and Schmieder, J.F., Optimal income taxation with unemployment and wage responses: A sufficient statistics approach (No. w21757). National Bureau of Economic Research. Werquin, N., Income Taxation with Frictional Labor Supply. 5 Other miscellaneous topics Meltzer, A.H. and Richard, S.F., A rational theory of the size of government. The Journal of Political Economy, pp Piketty, T., Social mobility and redistributive politics. The Quarterly journal of economics, pp Piketty, T., Theories of persistent inequality and intergenerational mobility. Handbook of income distribution, 1, pp Atkinson, A.B., Piketty, T. and Saez, E., Journal of economic literature, 49(1), pp Top incomes in the long run of history. Fleurbaey, M. and Maniquet, F., A theory of fairness and social welfare (Vol. 48). Cambridge University Press. Farhi, E. and Werning, I., Fiscal multipliers: Liquidity traps and currency unions (No. w18381). National Bureau of Economic Research. Bierbrauer, F.J. and Boyer, P.C., Efficiency, Welfare, and Political Competition. The Quarterly Journal of Economics, 131(1), pp