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464
On the Optimal Progressivity of the Income Tax Code
, 2005
"... This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for ..."
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Cited by 52 (7 self)
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This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2 % and a fixed deduction of about $9,400: The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7 % higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently
Taxing Capital? Not a Bad Idea After All
 American Economic Review
"... We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal pro ..."
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Cited by 47 (9 self)
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We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system.
Consumption and saving: Models of intertemporal allocation and their implications for public policy
 Journal of Economic Literature
, 1989
"... This paper provides a critical survey of the large literature on the life cycle model of consumption, both from an empirical and a theoretical point of view. It discusses several approaches that have been taken in the literature to bring the model to the data, their empirical successes, and their fa ..."
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Cited by 42 (2 self)
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This paper provides a critical survey of the large literature on the life cycle model of consumption, both from an empirical and a theoretical point of view. It discusses several approaches that have been taken in the literature to bring the model to the data, their empirical successes, and their failures. Finally, the paper reviews a number of changes to the standard life cycle model that could help solve the remaining empirical puzzles. 1.
Are Consumption Taxes Really Better Than Income Taxes
 Journal of Monetary Economics
, 1996
"... We use politicalequilibrium theory and the neoclassical growth model to compare the quantitative properties of different tax systems. We first explore whether societies which can only use consumption taxes fare better than societies which can only use income taxes. We find that if government outlay ..."
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Cited by 38 (6 self)
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We use politicalequilibrium theory and the neoclassical growth model to compare the quantitative properties of different tax systems. We first explore whether societies which can only use consumption taxes fare better than societies which can only use income taxes. We find that if government outlays are used mainly for redistribution through transfers, then the answer is no, contradicting conventional wisdom in public finance. The reason for this is that when taxes are endogenous, and voted on by a selfish constituency, the distortionary effects of taxation are taken into account in choosing the level of taxation. Hence, political equilibria have the property that taxes which are relatively distortionary will be relatively low. These results are overturned if the government outlays are used only for the providing of public goods, implying that less distortionary taxes give better outcomes. We also investigate the properties of a tax systems in which both consumption and income taxes are used and voted on simultaneously. Since the ability to use more tax instruments allows redistribution with less distortions, the total amount of transfers tends to be higher here than in onetax systems. Typically, tax systems tend to be selfperpetuating in the sense that changes of the tax system result in a reduction in the welfare of the median voter.
Optimal Fiscal Policy in a Stochastic Growth Model
, 1991
"... Although most neoclassical growth models focus on competitive equilibria which are Pareto optimal and ignore the role of government, recent works by Romer [28,29], Judd [20], Baxter and King [S], and Bizer and Judd [7] have shown that government can be introduced into and subop ..."
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Cited by 37 (0 self)
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Although most neoclassical growth models focus on competitive equilibria which are Pareto optimal and ignore the role of government, recent works by Romer [28,29], Judd [20], Baxter and King [S], and Bizer and Judd [7] have shown that government can be introduced into and subop
Optimal Indirect and Capital Taxation
, 2001
"... In this paper, we consider an environment in which agents’ skills are private information, are potentially multidimensional, and follow arbitrary stochastic processes. We allow for arbitrary incentivecompatible and physically feasible tax schemes. We prove that it is typically Pareto optimal to ha ..."
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Cited by 37 (5 self)
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In this paper, we consider an environment in which agents’ skills are private information, are potentially multidimensional, and follow arbitrary stochastic processes. We allow for arbitrary incentivecompatible and physically feasible tax schemes. We prove that it is typically Pareto optimal to have positive capital taxes. As well, we prove that in any given period, it is Pareto optimal to tax consumption goods at a uniform rate.
Optimal Taxation with Endogenous Insurance Markets.” NBER Working Paper #11185
, 2006
"... In this paper, we study optimal tax policy in a dynamic private information economy. We describe e ¢ cient allocations and competitive equilibria. The standard assumption in the literature is that trades are observable by all agents. We show that in such an environment the competitive equilibrium i ..."
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Cited by 35 (4 self)
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In this paper, we study optimal tax policy in a dynamic private information economy. We describe e ¢ cient allocations and competitive equilibria. The standard assumption in the literature is that trades are observable by all agents. We show that in such an environment the competitive equilibrium is e ¢ cient and that government consumption can be
nanced by lumpsum taxation. We go on to consider an environment with unobservable trades in competitive markets. We show that e ¢ cient allocations have the property that the marginal product of capital is di¤erent from the market interest rate associated with unobservable trades. In any competitive equilibrium without taxation, the marginal product of capital and the market interest rate are equated, so that competitive equilibria are not e ¢ cient. Taxation of capital income can be welfareimproving because such taxation introduces a wedge between market interest rates and the marginal product of capital and allows agents to obtain better insurance in private markets. We use plausibly calibrated numerical examples to compute optimal taxes and welfare gains and compare results to an economy with a restricted set of tax instruments, and to an economy with observable trades. Golosov acknowledges support of the University of Minnesota Doctoral Dissertation Fellowship. This work grew out of numerous discussions with V.V. Chari and would not be possible without his support and encouragement. We thank Andy Atkeson, Marco
Optimal Taxation in Theory and Practice
"... The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be ..."
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Cited by 31 (5 self)
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The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. We begin with a brief overview of how economists think about optimal tax policy, based largely on the foundational work of Ramsey (1927) and Mirrlees (1971). We then put forward eight general lessons suggested by optimal tax theory as it has developed in recent decades: 1) Optimal marginal tax rate schedules depend on the distribution of ability; 2) The optimal marginal tax schedule could decline at high incomes; 3) A flat tax, with a universal lumpsum transfer, could be close to optimal; 4) The optimal extent of redistribution rises with wage inequality; 5) Taxes should depend on personal characteristics as well as income; 6) Only final goods ought to be taxed, and typically they ought to be taxed uniformly; 7) Capital income ought to be untaxed, at least in expectation; and 8) In stochastic, dynamic economies, optimal tax policy requires increased sophistication. For each lesson, we discuss its theoretical underpinnings
Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development
, 2007
"... Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to several old ideas in development economics and proposes that linkages, complementarity, and superstar effects are ..."
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Cited by 31 (0 self)
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Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to several old ideas in development economics and proposes that linkages, complementarity, and superstar effects are at the heart of the explanation. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods ’ share of revenue is about 1/2, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Finally, the high elasticity of substitution associated with final consumption delivers a superstar effect: GDP depends disproportionately on the highest levels of productivity in the economy. This paper builds a model with links across sectors, complementary inputs, and highly substitutable consumption, and shows that it can easily generate 50fold aggregate income differences.