learning by doing and ben porath life cycle predictions and policy implications abstract many government policies affect incentives to acquire human capital two workhorse models dominate the literature analyzing these policies learning by doing lbd and ben porath bp this paper makes two novel findings related to these models first lbd and bp generate different predictions for life cycle earnings growth bp predicts that the heterogeneity in earnings growth rates across workers should disappear over the life cycle because the workers stop investing as they age the lbd model cannot replicate this feature because workers accumulate human capital automatically throughout the life cycle second the same model features that generate different life cycle predictions between bp and lbd also generate different implications for policies that affect the payoff to human capital accumulation to illustrate this quantitatively i show that increasing marginal labor tax rates for top earners depresses human capital accumulation more under bp as a result the laffer curve for top marginal income tax rates is flatter and peaks 10 percentage points lower with bp versus lbd

on the undesirability of commodity taxation even when income taxation is not optimal abstract an important result due to atkinson and stiglitz 1976 atkinson a b stiglitz j e 1976 the design of tax structure direct versus indirect taxation journal of public economics 6 55 75 is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax given weak separability of utility between labor and all consumption goods this article demonstrates that this conclusion holds regardless of whether the income tax is optimal in particular given any commodity tax and income tax system differential commodity taxation can be eliminated in a manner that results in a pareto improvement also differential commodity taxation can be proportionally reduced so as to generate a pareto improvement in addition for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation a simple efficiency condition is offered for determining whether a pareto improvement is possible

taxing top ceo incomes we use a firm ceo assignment framework to model the market for ceo effective labor in the model s equilibrium more talented ceos match with and supply more effort to larger firms taxation of ceo incomes affects the equilibrium pricing of ceo effective labor and hence spills over and affects firm profits absent the ability to tax profits or a direct concern for firm owners a standard prescription for high marginal income taxes emerges however given such an ability or concern the optimal marginal tax rates are much lower

optimal capital income taxation with incomplete markets borrowing constraints and constant discounting for a wide class of infinitely lived agent models chamley has shown that the optimal capital income tax rate is zero in the long run lucas has argued that for the u s economy there is a significant welfare gain from switching to this policy this paper shows that for the bewley class of models with incomplete insurance markets and borrowing constraints the optimal tax rate on capital income is positive even in the long run therefore cutting the capital income tax to zero may well lead to welfare losses

positive and normative judgments implicit in u s tax policy and the costs of unequal growth and recessions calculating the welfare implications of changes to economic policy or shocks requires economists to decide on a normative criterion one approach is to elicit the relevant moral criteria from real world policy choices converting a normative decision into a positive inference as in the recent surge of inverse optimum research we find that capitalizing on the potential of this approach is not as straightforward as we might hope we perform the inverse optimum inference on u s tax policy from 1979 through 2010 and argue that the results either undermine the normative relevance of the approach or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations

tax policy and income inequality in the united states 1979 2007 this paper assesses the effects of u s tax policy reforms on inequality over around three decades from 1979 to 2007 it applies a new method for decomposing changes in government redistribution into 1 a direct policy effect resulting from policy changes and 2 the effects of changing market incomes over the period as a whole the tax policy changes increased income inequality by pushing up the income share of high income earners the top 20 jel h23 h31 h53 p16

on the desirability of taxing capital income in optimal social insurance abstract this paper analyzes optimal linear taxes on labor income and savings in a two period life cycle model with ex ante identical households endogenous leisure demands in both periods and general processes of skill shocks over the life cycle we demonstrate that the atkinson stiglitz theorem breaks down under risk capital taxes are employed besides labor income taxes for two distinct reasons i capital taxes reduce labor supply distortions on second period labor supply since second period labor supply and saving are substitutes ii capital taxes insure first period income risk although this benefit is partially off set because first period labor supply and saving are complements our results imply that retirement saving should not be actuarially fair

energy subsidies in california s electricity market deregulation deregulation and re regulation of california s electricity market not only failed in terms of anticipated cost reductions improved customer service and higher competition it also led to the introduction of various additional energy subsidies this paper analyzes california s electricity market deregulation process from a subsidy viewpoint under deregulation in california investor owned utilities were not allowed to pass their energy procurement costs fully on to their customers and therefore subsequently and inevitably ran into severe financial problems such retail price regulation is an energy subsidy that is both economically and environmentally unfavorable because it veils true price signals to electricity consumers and in this way discourages energy conservation other policies implemented in california that represent perverse energy subsidies are the purchase of power by the state of california the suspension of retail competition and the potential misuse of money from the recovery of stranded costs many interventions implemented by the state to smooth out the impacts of the energy crisis insulated electricity consumers from market realities supported the existing structure of california s electricity market which is predominantly based on fossil fuels and suppressed market incentives to improve energy conservation

the incidence of income taxes on high earners in canada this article explores the brain drain explanation for the concentration of incomes in canada during the past 30 years namely that high skilled canadians make use of high salaries on offer in the united states to extract higher salaries at home if this is the case then for a given level of us salaries the threat to accept outside offers should be more credible when the canadian dollar is depreciating against the us dollar and weaker when the canadian dollar is appreciating the data are broadly consistent with this claim income concentration worsened during the depreciations of the 1980s and 1990s and eased when the canadian dollar began to appreciate in value the article develops a simple two parameter model based on the propositions that high earners in canada can use us salaries to bargain for higher salaries and that canadian high earners can shelter part of their income from personal income taxes it also offers some preliminary evidence about the parameter values consistent with available data the results suggest that higher top marginal personal income tax rates may potentially accentuate top end after tax income inequality if high earners are able to use their bargaining power to extract pay increases to offset higher tax rates then the burden of increased personal income taxes will be deflected elsewhere and may even have the perverse effect of making the after tax income distribution more unequal than it was before l incidence des impots sur le revenu des hauts salaries au canada cet article examine l hypothese des produits de base produits de base produits de base produits de base produits de base fuites des cerveaux comme explication pour la concentration des revenus au canada pendant les dernieres decennees c est a dire que les canadiens hautement qualifies se servent des salaires offerts aux etats unis pour negocier des salaires plus eleves au canada si tel est le cas la menace d emigrer aux etats unis est plus credible lorsque le dollar canadien deprecie contre le dollar americain et elle est moins credible pendant une appreciation les grandes lignes des variations des donnees vont dans le sens de cette conjecture la concentration des revenus a accru pendant les depreciations des annees 1980 et 1990 et cette tendance a renverse la direction suite a l appreciation du dollar canadien l article developpe un modele a deux parametres base sur les propositions que les hauts salaries au canada peuvent utiliser les salaires aux etats unis afin de negocier des salaires plus eleves et que les hauts salaries se servent de la planification fiscale afin de mettre une partie de leurs revenus a l abri des impots des estimations preliminaires pour les parametres sont presentees les resultats suggerent qu une augmentation du taux marginal d imposition pourrait meme accentuer l inegalite des revenus apres impots si les hauts salaries sont capables de negocier des salaires plus eleves face aux augmentations des taux d imposition le fardeau du nouvel impot serait refile ailleurs la distribution des revenus nets pourrait meme devenir encore plus inegale

using elasticities to derive optimal income tax rates this paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates a simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution in the general non linear income tax problem this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of mirrlees the optimal non linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution these formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters

stock price reactions to lifo adoptions the association between excess returns and lifo tax savings although long a topic of accounting research little is known about the motives for or effects of voluntary changes in accounting techniques among the motives which have been suggested are attempts by managers to smooth reported earnings gordon 1964 copeland 1968 cushing 1969 white 1972 and ronen and sadan 1981 to influence man agement compensation to reduce regulatory or political costs watts and zimmerman 1978 and to avoid bond covenant restrictions holthausen 1981 while some of these motives may be consistent with a market value rule they often fail to provide unambiguous accounting change predictions e g which accounting changes result in lower regulatory costs moreover empirical verification has been constrained by the unobservability of the variables to which the managers allegedly respond the stock price reaction which should be expected for a given account ing change depends not only on its implications for the valuation of securities but also on the extent to which the implications are already known or anticipated by investors 3 ultimately our ability to detect these stock price effects if any depends on the power of our tests previous studies of the effects of accounting changes have generally not found significant stock price reactions archibald 1972 ball 1972 kaplan and roll 1972 harrison 1977 and holthausen 1981 4 for the most part these studies dealt with accounting changes which had no direct cash flow effects in contrast changes in inventory costing methods especially those involving the last in first out lifo cost flow assumption can generate potentially large changes in a firm s cash flows due to their impact on taxable earnings these cash flow effects provide not only a motive for lifo changes5 which is consistent with the market value rule but also implications for associated stock price effects if investors react to lifo s cash flow implications rather than to its effects on reported earnings then positive stock price adjustments should be associated with lifo adjustments however the evidence from previous studies of stock price reactions to lifo adoptions is inconclusive ball 1972 sunder 1973 1975 abdel khalik and mckeown 1978 brown 1980 and ricks 1982 while several factors may account for these results see section 2 it can be noted that the previous studies have considered only a dichotomous variable whether or not a firm has adopted lifo yet because the cash flow consequences of a lifo adoption decision depend on a number of firm specific factors this approach ignores potentially large differences among firms in the economic consequences of lifo adoptions most firms switching to lifo now reveal in their financial statement disclosures the tax savings which have been realized this study uses these disclosures to examine the association between unsystematic re turns and the magnitudes of first year lifo tax savings for all nyse firms which adopted or extended their use of lifo during the period 1972 80 subject to data availability 6 the research design employs within group comparisons based on cumulative monthly unsystematic excess returns with appropriate controls for unexpected earnings per formance 7 this design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash flow effects of lifo adoptions as reported more fully below results based on lifo adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of lifo tax savings 8 the results also provide evidence that changes in systematic risk may accompany lifo adoptions however contrary to previous studies most of the sample firms exhibit downward rather than upward changes in systematic risk section 2 reviews the previous studies of stock price reactions to lifo adoptions and suggests explanations for their results section 3 discusses the alternative approach employed in this study while section 4 describes the test methodologies employed the data and data selection procedures are described in section 5 the results and a discussion are presented in section 6 section 7 offers some conclusions

security analyst superiority relative to univariate time series models in forecasting quarterly earnings abstract this paper provides evidence of security analyst sa superiority relative to univariate time series ts models in predicting firms quarterly earnings numbers and shows that sa forecast superiority in our sample is attributable to 1 better utilization of information existing on the date that ts model forecasts can be initiated a contemporaneous advantage and 2 use of information acquired between the date of initiation of ts model forecasts and the date when sa forecasts are published a timing advantage

designing optimal disability insurance a case for asset testing we analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes an optimum is implemented by an asset tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum the logic behind this result is that an agent who plans to falsely claim disability a finds doing so unattractive if he does not adjust his savings and b cannot collect disability insurance if he does adjust his savings in the desired direction upward for a calibrated economy we find that welfare gains from asset testing are significant

california s dysfunctional electricity market policy lessons on market restructuring abstract the restructured electricity market in california has been behaving oddly and badly since summer of 2000 electricity prices have been exorbitantly high and highly volatile despite the high prices the three investor owned utilities are in dire financial shape because they cannot pass on the high costs of wholesale power to their customers due to a rate freeze many policymakers in the us and elsewhere want to know what went wrong in california trying to avoid a similar fate as they proceed with their own market liberalization plans

redistribution and social insurance we study optimal redistribution and insurance in a life cycle economy with private idiosyncratic shocks we characterize pareto optima show the forces determining optimal labor distortions and derive closed form expressions for their limiting behavior the labor distortions for high productivity shocks are determined by the labor elasticity and the higher moments of the shock process the labor distortions for low productivity shocks are determined by the autocorrelation of the shock process redistributive objectives and past distortions in a model calibrated using newly available estimates of idiosyncratic shocks the labor distortions are u shaped and the savings distortions generally increase in current earnings jel d82 d91 h21 h23 i38 j22 j24

heterogeneity and government revenues higher taxes at the top abstract how effective is a more progressive tax scheme in raising revenues we answer this question in a life cycle economy with heterogeneity across households and endogenous labor supply our findings show that a tilt of the u s income tax schedule towards high earners leads to small increases in revenue maximal revenue in the long run is only 6 8 higher than in our benchmark about 0 8 of initial gdp while revenues from all sources increase by just about 0 6 our conclusions are that policy recommendations of this sort are misguided if the aim is to exclusively raise government revenue

marginal tax rates and income new time series evidence this paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the united states over the 1950 2010 period after isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach i find large positive effects of tax cuts in the top 1 of the income distribution in contrast to earlier findings based on tax return data i also find large effects in other income percentile brackets a hypothetical tax reform cutting marginal rates only for the top 1 leads to sizeable increases in top 1 incomes and has a positive effect on real gdp there are also spillover effects to incomes outside of the top 1 but top marginal rate cuts lead to greater inequality in pre tax incomes

measuring economic efficiency using inverse optimum weights abstract this paper provides a method to measure the traditional kaldor hicks notion of economic efficiency when taxes affect behavior in contrast to traditional unweighted surplus measuring efficiency requires weighting individual benefits or surplus by the marginal cost to the government of providing a 1 transfer at each income level these weights correspond to the solution to the inverse optimum program in the optimal tax literature they are the social planning weights that would rationalize the status quo tax schedule as optimal i estimate the weights using the universe of us income tax returns from 2012 the results suggest that measuring economic efficiency requires weighting surplus accruing to the poor roughly 1 5 2 times more than surplus accruing to the rich this is because 1 of surplus to the poor can be turned into roughly 1 5 2 of surplus to the rich by reducing the progressivity of the tax schedule following kaldor and hicks original applications i compare income distributions over time in the us and across countries the results suggest us economic growth is 15 20 lower due to increased inequality than is suggested by changes in gdp because of its higher inequality the u s is unable to replicate the income distribution of countries like austria and the netherlands despite having higher national income per capita

income shifting within a dual income tax system evidence from the finnish tax reform of 1993 dual income tax systems can suffer from income that shifts from progressively taxed labour income to capital income which is taxed at a lower flat rate this paper empirically examines the 1993 finnish dual income tax reform which radically reduced the marginal tax rates on capital income for some but not all taxpayers we measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform we find that the reform led to a small positive impact on overall taxable income but part of the positive response was probably offset by income shifting among the self employed

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 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 lump sum 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 and the extent to which it is consistent with actual tax policy to preview our conclusions we find that there has been considerable change in the theory and practice of taxation over the past several decades although the two paths have been far from parallel overall tax policy has moved in the y n gregory mankiw is professor of economics matthew weinzierl is assistant professor of business administration and danny yagan is a ph d candidate in economics all at harvard university cambridge massachusetts their e mail addresses are ngmankiw

income inequality tax policy and economic growth we investigate how the reduction of income inequality through tax policy affects economic growth taxation at different points of the income distribution has heterogeneous impacts on households incentives to work invest and consume using us state level data and micro level household tax returns over the last three decades we find that reducing income inequality between low and median income households improves economic growth however reducing income inequality through taxation between median and high income households reduces economic growth these asymmetric economic growth effects are attributable both to supply side factors i e changes in small business activity and labour supply and to consumption demand

indirect taxation is superfluous under separability and taste homogeneity a simple proof indirect taxation is of no use when nonlinear income taxation is available in an economy where everyone has the same taste for goods an elementary proof of this result due to atkinson and stiglitz atkinson a stiglitz j 1976 the design of tax structure direct versus indirect taxation journal of public economics 6 55 75 is provided

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

analyst forecast errors and stock price behavior near the earnings announcement dates of lifo adopters between june 1974 and may 1975 over 400 firms on the new york and american stock exchanges adopted the last in first out lifo inventory costing method responding to the first round of double digit inflation since wwii these firms were able to assign their newer and thus higher inventory costs to units sold thereby realizing substantial tax savings 1 however ricks 1982 found that stock returns near the earnings disclosure dates of 1974 lifo adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using lifo given that firms adopting lifo in 1974 were voluntarily switching to an accounting method providing often significant tax savings it is not obvious why investors would have reacted negatively nor is it likely that investors were unaware of many of the firms lifo adoption decisions stevenson 1987 found that at least two thirds of the firms in ricks sample had disclosed their lifo adoptions prior to their earnings disclo sure dates if investors were reacting to the effects of the lifo adoptions why did they react negatively given the increased cash flows and prior disclosures if investors were not reacting to the effects of the lifo adoptions what caused the significant negative excess returns near the earnings disclosure dates of firms adopting lifo in 1974 this study presents evidence suggesting that the negative excess re turns observed by ricks 1982 were associated with and possibly due to analysts systematic overestimates of earnings of firms adopting lifo in 1974 we are aware of no previous study documenting systematic errors in analysts earnings forecasts conditional on a voluntary account ing method change as a first step we assess the generality of ricks finding by examining excess returns near the preliminary earnings disclosure dates hereafter prelim dates of all new york nyse and american stock exchange amex firms adopting lifo between 1973 and 1980 the results confirm negative excess returns around the prelim dates of firms adopt ing lifo in 1974 there is little evidence of significant excess returns negative or positive near the prelim dates of firms adopting lifo in other years to explain the negative returns of the 1974 adopters we examine the association between excess returns and earnings forecast errors we find that standard poor s analysts systematically overestimated the earn ings of these firms analyst forecast errors are found to be significantly correlated with both the excess returns around the prelim dates and the earnings reductions due to the lifo adoptions finally we offer two possible explanations for the negative excess returns and the positive correlations between excess returns analyst earnings forecast errors and earnings effects of the 1974 lifo adoptions first the limited availability of information regarding the likely earnings effects of the 1974 lifo adoptions combined with the relative novelty of this accounting change may have led analysts and investors to underestimate the lifo earnings effects and may have made it difficult for the market to discern immediately the cause of the resulting negative forecast errors evidence consistent with this limited information hypothesis is found in the predictions of value line analysts of lifo earnings effects the actual mean earnings per share effect of the lifo adoptions 947 was 62 higher than the average value line estimate 584 however tests for the stock price reversals which would be implied by the limited information explanation are inconclusive a second possible explanation is that the magnitudes of lifo earnings effects were caused by and or provided implications regarding another factor which was important in valuing the firms yet difficult for analysts and investors to predict inflation is suggested as the likely candidate since lifo tax savings are a function of the rate at which inventory costs are increasing firms experiencing higher rates of inflation would have greater incentives to adopt lifo 4 thus the self selected sample of firms which adopted lifo in 1974 may include firms most affected by that year s surge of inflation since the extent to which inventory costs have increased is reflected in the magnitudes of the earnings effects of lifo adoptions the negative analyst forecast errors and the positive correlation between these forecast errors and the earnings effects of lifo adoptions could be explained by analyst underestimates of the rates of inflation experienced by these firms evidence consistent with this inflation hypothesis is found in the fact that managers of firms adopting lifo underestimated the impact of inflation on their own firms in addition negative excess returns and earnings overestimates are observed for a sample of established lifo users consistent with analysts and investors being surprised by the impact of inflation on these firms as well however aggregate tests based on cross industry correlations between changes in wholesale prices and lifo related variables are generally inconclusive

an evaluation of the welfare effects of reducing energy subsides in iran abstract energy prices in iran have traditionally been heavily subsidized by the government and as a result energy consumption per capita in iran is close to the european union level the welfare effects of efforts to raise energy prices closer to world levels are examined in this paper reform of energy prices is an important element of the economic reform plan 2010 2014 for iran we first analyze the relationship between energy consumption energy and non energy prices by estimating the household expenditure function the results show that a higher energy prices will decrease energy consumption by iranian households second we evaluate the impact of a rise of energy prices on the household welfare by measuring the compensating variation cv in five steps with a compensating payment the results show that iranian household welfare will increase with a 100 or 200 rise in energy prices if the government pays 20 30 or 50 of the 20 billion income resulting from removing energy subsidies while in contrast iranian household welfare will decrease with a 400 and 500 rise in energy prices if the government payment is 20 or 30 of 20 billion income

the optimal elasticity of taxable income abstract the strength of the behavioral response to a tax rate change depends on the environment individuals operate in and may be manipulated by instruments controlled by the government we first derive a measure of the social benefit to affecting this elasticity the paper then examines this effect in the solution to the optimal income taxation problem when such an instrument is available first in a general model and then in an example when the government chooses the income tax base

the taxation of superstars how are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution to answer this question we extend the mirrlees model to incorporate an assignment problem in the labor market that generates superstar effects perhaps surprisingly rather than providing a rationale for higher taxes we show that superstar effects provide a force for lower marginal taxes conditional on the observed distribution of earnings superstar effects make the earnings schedule convex which increases the responsiveness of individual earnings to tax changes we show that various common elasticity measures are not sufficient statistics and must be adjusted upwards in optimal tax formulas finally we study a comparative static that does not keep the observed earnings distribution fixed when superstar technologies are introduced inequality increases but we obtain a neutrality result finding tax rates at the top unaltered

relativity mobility and optimal nonlinear income taxation in an open economy abstract recent evidence suggests that globalization has reduced the barriers to international labor mobility and induced more cross country social comparisons in an open economy with tax driven migration and consumption externalities relativity we derive an optimal tax formula that subsumes existing ones obtained under a maximin social objective and additively separable utility and sign the second best mirrleesian marginal tax rates for all skill levels we establish the thresholds of the elasticity and level of migration to determine when relativity and inequality act as complements or substitutes in shaping the optimal top tax rate under both nash and stackelberg tax competition if the migration probability of top income workers is approximately 50 numerical calculation using parameter estimates from empirical studies shows that the country with labor inflow outflow implements over 10 lower higher marginal tax rates than suggested by the autarky equilibrium of kanbur and tuomala 2013

the market s response to the 1974 lifo adoptions in this paper i report the results of a study of stock price reactions to lifo adoptions in 1974 and 1975 these two years were characterized by high levels of inflation and wide swings in stock prices and more than 400 firms on the new york and american stock exchanges switched to lifo previous studies see below provide conflicting results of the market s reaction to lifo adoptions these studies exhibit certain research design and small sample limitations which prevent one from resolving the issue of how the market reacts to lifo switches using a better matched pair design and a larger sample i conclude that lifo adopters suffered negative abnormal return performance during the period surrounding their annual earnings announcements while several possible explanations for this result are discussed additional research is needed to provide further insight into the nature of the market reaction to lifo adoption

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

education and optimal dynamic taxation the role of income contingent student loans we study the optimal design of integrated education finance and tax systems the distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry consistent with empirical evidence this human capital investment decision is risky we find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income contingent repayment can always be designed in a pareto optimal way we present a simple empirically driven application of the framework to us data in which individuals make a college entry decision we find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards so although the full optimum could lead to complicated non linear schedules in theory very simple instruments can replicate it fairly well the welfare gains from income contingent repayment are significant

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

capital income taxation wealth distribution and borrowing constraints the theorem of zero taxation of capital income is reexamined and is shown to hinge critically on the assumptions of a long horizon and perfect markets for the inter temporal allocation of resources the theorem does not hold when borrowing constraints prevent individuals from insuring against idiosyncratic shocks and have a precautionary motive for savings structural assumptions are made such that with no taxation aggregate savings are socially excessive in the long run i e the rate of return is smaller than the discount rate sufficient conditions for a pareto efficient taxation or subsidization of capital in the long run depend on the correlation between individuals consumption and savings a subsidy may be efficient when individuals incomes follow a predictable pattern of life cycles with no negative bequest 2001 elsevier science b v all rights reserved

optimal progressive capital income taxes in the infinite horizon model abstract this paper analyzes optimal progressive capital income taxation in an infinite horizon model where individuals differ only through their initial wealth we consider progressive capital income tax schedules taking a simple two bracket form with an exemption bracket at the bottom and a single marginal tax rate above a time varying exemption threshold individuals are taxed until their wealth is reduced down to the exemption threshold the fraction of individuals subject to capital income taxation vanishes to zero in the long run in analogy to the zero long run capital tax result of chamley and judd with optimal linear taxes however in contrast to linear taxation optimal nonlinear capital taxation can have a drastic impact on the long run wealth distribution when the intertemporal elasticity of substitution is not too large and the top tail of the initial wealth distribution is infinite and thick enough the optimal exemption threshold converges to a finite limit as a result the optimal tax system drives all the large fortunes down a finite level and produces a truncated long run wealth distribution

the value of tax progressivity evidence from survey experiments abstract the aim of this paper is to investigate how people value tax progressivity more precisely i study the potential trade off between any improvement in the final income distribution and the progressivity of the tax schedule to do this i designed survey experiments in which respondents were asked to rank or to choose between different taxation redistribution schemes with different treatments varying in terms of information availability 1 when only information about final incomes is provided and 2 when information about average tax rates is also available using a within subject design the instability of rankings between 1 and 2 indicates whether or not respondents value tax progressivity i find that information about tax rates significantly affects respondents judgments about tax schemes they exhibit a strong preference for tax progressivity i e they accept a fall in the quality of the final income distribution in exchange for progressive taxation the results of an additional treatment suggest that the mere fact of providing new information cannot account for this finding

do americans want to tax wealth evidence from online surveys abstract a vast theoretical literature in public finance has studied the desirability of capital taxation this discussion largely ignores the political feasibility of taxing wealth we provide to our knowledge the first investigation of individuals preferences over jointly taxing income and wealth we provide subjects with a set of hypothetical individuals incomes and wealth and elicit subjects preferred absolute tax bill for each individual our method allows us to unobtrusively map both income earned and accumulated wealth into desired tax levels our regression results yield roughly linear desired tax rates on income of about 14 respondents suggested tax rates indicate positive desired wealth taxation when we distinguish between sources of wealth we find that in line with recent theoretical arguments subjects implied tax rate on wealth is 3 when the source of wealth is inheritance far higher than the 0 8 rate when wealth is from savings textual analysis of respondents justifications for their tax rates imply limited concern for the elasticity of tax bases with respect to net of tax rates

top income shares in canada recent trends and policy implications according to canadian taxfiler data over the last thirty years there has been a surge in the income shares of the top 1 top 0 1 and top 0 01 of income recipients even with longitudinal smoothing by individual using three or five year moving averages top shares fell in 2008 and 2009 but only by a fraction of the overall surge alberta british columbia and ontario have much more pronounced surges than other provinces part of the canadian surge is likely attributable to u s factors but a comprehensive explanation remains elusive even so i draw implications for policies that might achieve some support from across the political spectrum including the elimination of tax preferences that favour those with high incomes the promotion of shareholder democracy and to maintain canada s relatively high intergenerational mobility continued wide accessibility to healthcare and education

the optimal treatment of tax expenditures abstract this paper analyzes the optimal treatment of tax expenditures it develops an optimal tax model where individuals derive utility from spending on a contribution good such as charitable giving the contribution good has also a public good effect on all individuals in the economy the government imposes linear taxes on earnings and on the contribution good so as to maximize welfare the government may also finance directly the contribution good out of tax revenue optimal tax and subsidy rates on earnings and the contribution good are expressed in terms of empirically estimable parameters and the redistributive tastes of the government the optimal subsidy on the contribution good is increasing in the size of the price elasticity of contributions the size of the crowding out effect of public contributions on private contributions and the size of the public good effect of the contribution good numerical simulations show that the optimal subsidy on contributions is fairly sensitive to the size of these parameters but that in most cases it should be lower than the earnings tax rate

the top 1 percent in international and historical perspective world top incomes database at http topincomes parisschoolofeconomics eu and has represented a challenge to the economics profession stories based on the and has represented a challenge to the economics profession stories based on the supply and demand for skills are not enough to explain the extreme top tail of supply and demand for skills are not enough to explain the extreme top tail of the earnings distribution nor is it enough to look only at earned incomes different the earnings distribution nor is it enough to look only at earned incomes different approaches are necessary to explain what has happened in the united states over approaches are necessary to explain what has happened in the united states over the past century and also to explain the differing experience in other high income the past century and also to explain the differing experience in other high income countries over recent decades we begin with the international comparison in the countries over recent decades we begin with the international comparison in the fi rst section and then turn to the causes and implications of the evolution of top fi rst section and then turn to the causes and implications of the evolution of top income shares income shares

the efficiency gains from dynamic tax reform this paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general equilibrium rational expectations growth path of life cycle economies the principal findings concern the effects of switching from a proportional income tax with rates similar to those in the u s to either a proportional tax on consumption or a proportional tax on labor income a switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources in contrast a transition to wage taxation generates a loss of greater than percent of lifetime re sources a second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost this abstract was borrowed from another version of this item

trading down and the business cycle abstract we document two facts first during the great recession consumers traded down in the quality of the goods and services they consumed second the production of low quality goods is less labor intensive than that of high quality goods when households traded down labor demand fell increasing the recession s severity we find that the trading down phenomenon accounts for a substantial fraction of the decline in u s employment in the recent recession we show that embedding quality choice in a business cycle model improves the model s amplification and comovement properties

the elasticity of taxable income with respect to marginal tax rates a critical review this paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data first we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis we discuss what other parameters should be estimated when the elasticity is not a sufficient statistic second we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the united states to illustrate those issues third we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out finally we discuss avenues for future research jel h24 h31 j22

relativity inequality and optimal nonlinear income taxation how does concern for consumption relative to others relativity affect the structure of optimal nonlinear income taxation our article provides three sets of answers to this general question first it supports the conclusion in the literature that relativity leads to higher marginal tax rates in doing so it both generalizes some of the conditions under which this result is obtained in the literature and fleshes out the detailed structure for optimal marginal tax rates for specific functional forms for distribution utility function and social welfare function second the article goes beyond the literature and examines the impact of relativity on the progression of optimal marginal tax rates by and large we find support for greater progressivity defined as the steepness of the rise of the marginal tax rate schedule as relativity concern increases third none of the papers in the literature to our knowledge examines the interplay of relativity and inequality in determining the optimal structure of income taxes our special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and the progression of marginal tax rates more work is needed to further explore this interaction between relativity and inequality that our analysis has uncovered

a simpler theory of optimal capital taxation abstract this paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics we first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth in this case there are no transitional dynamics the steady state is reached immediately and has finite elasticities of capital with respect to the net of tax rate this allows for a tractable optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences that can address many important policy questions these formulas can easily be taken to the data to simulate optimal taxes which we do using u s tax return data on labor and capital incomes second we show how these results can be extended to the case with concave utility for consumption the same types of formulas carry over by appropriately defining elasticities we show that one can recover all the results from the simpler model using a new and non standard steady state approach that respects individual preferences even with a fully general utility function

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

inequality and financial fragility abstract i study how the distribution of wealth influences the government s response to systemic banking crises and shapes financial fragility distributional concerns tend to make full government guarantees of deposits credible for relatively poor individuals but not for wealthier individuals as a result wealthier individuals have a stronger incentive to panic and in equilibrium the institutions in which they invest are endogenously more likely to experience runs and receive partial bailouts even under utilitarian government moreover the shape of the wealth distribution affects the level of financial fragility recognizing this fact may alter the government s desire to redistribute wealth ex ante

payroll tax financed social insurance with variable retirement the optimal relationship between retirement benefits and retirement age is derived the model assumes ex ante identical workers zero one labor supply no private savings wages and payroll taxes constant over life random onset of an inability to work and the impossibility of distinguishing those unable to work from those choosing retirement this formulation is meant to capture some issues for retirement programs where governments commonly do not measure disability e g ages 65 70 with intertemporally additive preferences optimal benefits rise with the age of retirement but more slowly than would be actuarially fair a nonadditive example is also considered

feasible smooth income tax schedules benefits and distributional implications existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden in this paper we propose a class of progressive smooth functions to replace persona

optimal taxation and spending in general competitive growth models abstract we find that the optimal long run tax on capital income is zero even if the capital stock does not converge to a steady state nor to a steady state growth rate the optimal tax on human capital is also zero if human capital is not a final good but the long run wage tax is not generally zero we argue that consumption tax proposals such as the flat tax are not consumption taxes and are biased against human capital

is economics useful for public policy economists have always played an important role in major public policy debates even so i believe that the role of economists in these public policy discussions has often been misguided because it has typically relied upon best practices stated in the form of general guidelines or even universal principles however best practices are not best if the specific situation does not conform with the assumptions that underlie the advice so my first conclusion is a cautionary and negative one specific circumstances differ so profoundly across individuals firms markets countries and time that most any attempt to define best practices that apply in all circumstances will lead to profoundly misleading public policy recommendations however even if economics cannot identify the truth it can often identify a truth so my second conclusion is a more positive one economists should continue to develop multiple theories that inform public policies but we should also focus our efforts on identifying and testing the critical assumptions that drive the results of these theories recognizing that the validity of any assumptions will depend intimately on specific circumstances i illustrate these two main conclusions with specific examples from my own work i conclude with some best practices recommendations of my own recognizing the obvious irony of such an effort

optimal income transfer programs intensive versus extensive labor supply responses this paper analyzes optimal income transfers for low incomes labor supply responses are modeled along the intensive margin intensity of work on the job and along the extensive margin participation into the labor force when behavioral responses are concentrated along the intensive margin the optimal transfer program is a classical negative income tax program with a substantial guaranteed income support and a large phasing out tax rate however when behavioral responses are concentrated along the extensive margin the optimal transfer program is similar to the earned income tax credit with negative marginal tax rates at low income levels and a small guaranteed income carefully calibrated numerical simulations are provided

a unified welfare analysis of government policies we conduct a comparative welfare analysis of 133 historical policy changes over the past half century in the united states focusing on policies in social insurance education and job training taxes and cash transfers and in kind transfers for each policy we use existing causal estimates to calculate both the benefit that each policy provides its recipients measured as their willingness to pay and the policy s net cost inclusive of long term impacts on the government s budget we divide the willingness to pay by the net cost to the government to form each policy s marginal value of public funds or its mvpf comparing mvpfs across policies provides a unified method of assessing their impact on social welfare our results suggest that direct investments in low income children s health and education have historically had the highest mvpfs on average exceeding 5 many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers we find large mvpfs for education and health policies amongst children of all ages rather than observing diminishing marginal returns throughout childhood we find smaller mvpfs for policies targeting adults generally between 0 5 and 2 expenditures on adults have exceeded this mvpf range in particular if they induced large spillovers on children we relate our estimates to existing theories of optimal government policy and we discuss how the mvpf provides lessons for the design of future research

taxing top earners a human capital perspective we assess the consequences of substantially increasing the marginal tax rate on u s top earners using a human capital model we nd that 1 the peak of the model laer curve occurs at a 52 percent top tax rate 2 if human capital were exogenous then the top of the laer curve would occur at a 66 percent top tax rate and 3 applying the theory and methods that diamond and saez 2011 use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent

top incomes in the long run of history a recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics top incomes represent a small share of the population but a very significant share of total income and total taxes paid hence aggregate economic growth per capita and gini inequality indexes are sensitive to excluding or including top incomes we discuss the estimation methods and issues that arise when constructing top income share series including income definition and comparability over time and across countries tax avoidance and tax evasion we provide a summary of the key empirical findings most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks top income shares do not recover in the immediate postwar decades however over the last thirty years top income shares have increased substantially in english speaking countries and in india and china but not in continental european countries or japan this increase is due in part to an unprecedented surge in top wage incomes as a result wage income comprises a larger fraction of top incomes than in the past finally we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

progressive taxation in a tournament economy abstract not enough is known about the responsiveness of individuals in particular those who work under different incentives to changes in marginal tax rates we ask whether changes in tax rates are less distortionary for workers engaged in a contest to examine this potential rationale for a more progressive tax code we first model the effort decisions of workers faced with progressive taxation under tournaments and piece rates because of the difficulty identifying any distortion that may be induced by the tax code in naturally occurring data we then report on the results of a real effort experiment based on this model consistent with a behavioral approach to public finance we find that competitive tournament workers are less sensitive and hint in our discussion at the possible welfare benefits of progressive taxation in tournament economies

progressive estate taxation we present a model with altruistic parents and heterogeneous productivity we derive two key properties for optimal estate taxation first the estate tax should be progressive so that parents leaving a higher bequest face a lower net return on bequests second marginal estate taxes should be negative so that all parents face a marginal subsidy on bequests both properties can be implemented with a simple nonlinear tax on bequests levied separately from the income tax these results apply to other intergenerational transfers such as educational investments and are robust to endogenous fertility choices both estate or inheritance taxes can implement the optimal allocation but we show that the inheritance tax has some advantages finally when we impose an ad hoc constraint requiring marginal estate taxes to be nonnegative the optimum features a zero tax up to an exemption level and a progressive tax thereafter

the promise of positive optimal taxation normative diversity and a role for equal sacrifice abstract a prominent assumption in modern optimal tax research is that the objective of taxation is utilitarian i present new survey evidence that most people reject this assumption s implications for several prominent features of tax policy instead preferring tax policies based at least in part on a classic alternative objective the principle of equal sacrifice i generalize the standard model to accommodate this preference for a mixed objective proposing a method by which to make disparate criteria commensurable while respecting pareto efficiency then i show that optimal policy in this generalized model calibrated to the survey evidence and u s microdata is capable of quantitatively matching several features of existing tax policy that are incompatible in the conventional model but widely endorsed in the survey and reality including the coexistence of substantial redistribution and limited tagging together these findings demonstrate the potential of a positive theory of optimal taxation

taxation and the allocation of talent taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying nonpecuniary incentives of pursuing a calling estimates from the literature suggest that high paying professions have negative externalities whereas low paying professions have positive externalities a calibrated model therefore prescribes negative marginal tax rates on middle class incomes and positive rates on the rich the welfare gains from implementing such a policy are small and are dwarfed by the gains from profession specific taxes and subsidies these results depend crucially on externality estimates and labor substitution patterns across professions both of which are very uncertain given existing empirical evidence

how progressive is the u s federal tax system a historical and international perspective this paper provides estimates of federal tax rates by income groups in the united states since 1960 with special emphasis on very top income groups we include individual and corporate income taxes payroll taxes and estate and gift taxes the progressivity of the u s federal tax system at the top of the income distribution has declined dramatically since the 1960s this dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income the sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity international comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity both for time trends and for cross country comparisons the pattern for the united kingdom is similar to the u s pattern france had less progressive taxes than the united states or the united kingdom in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the united states or the united kingdom

the sufficient statistic approach predicting the top of the laffer curve abstract a formula for the revenue maximizing top tax rate is derived as a function of three elasticities the formula applies to static models and to steady states of dynamic models and is relevant for the top tax rate on any component of income the formula is applied to several classic models the application of the formula is also illustrated using a quantitative human capital model

what happens when you tax the rich evidence from executive compensation this paper examines the responsiveness of taxable income to changes in marginal tax rates using detailed compensation data on several thousand corporate executives from 1991 to 1995 the data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income indeed this small group of executives may account for as much as 20 percent of the aggregate change in wage and salary income for approximately the one million richest taxpayers over this time period one person alone can account for more than 2 percent the decline however is almost entirely a short run shift in the timing of compensation rather than a permanent reduction in taxable income the short run elasticity of taxable income with respect to the net of tax share exceeds one in this sample but the elasticity after one year is at most 0 4 and probably closer to zero breaking out the tax responsiveness of different types of compensation shows that the large short run responses come almost entirely from a large inc

monopoly regulation discontinuity stranded assets abstract for regulated electricity utilities if trend load growth enters a state of terminal decline through disruptive competition and costs are unable to contract at a similar rate the regulatory outcomes that follow produce strikingly different results to an equivalent episode in a competitive market where profits fall and assets are written off under economic regulation prices rise to offset volumetric losses and in the presence of disruptive competition a destructive price spiral can ensue in these circumstances some component of the regulated utility s assets meet the definition of stranded failure to deal with stranded assets will eventually and needlessly damage shareholders consumers and welfare however the regulatory compact makes this an especially complex area of economics zero recovery of stranded monopoly assets is not credible policy a normative analysis of economics and law suggests full recovery is not credible either in this article asset stranding experience from the us is reviewed and a series of policy principles are established viz asset stranding is a case by case proposition involving recovery via non bypassable pricing mechanisms quantified and packaged as a partial return of capital possibly financed by transition bonds on a time limited basis financial risk tolerances of the utility and the stability of post stranding consumer tariffs are important parameters that should guide the policy approach to asset stranding but ultimately asset stranding is a policy choice not an analytical determination

optimal income taxation when asset taxation is limited several frictions restrict the government s ability to tax assets first it is very costly to monitor trades on international asset markets second agents can resort to nonobservable low return assets such as cash gold or foreign currencies if taxes on observable assets become too high this paper shows that limitations in asset taxation have important consequences for the taxation of labor income we study a simple dynamic moral hazard model of social insurance with observable and nonobservable saving decisions we find that optimal labor income taxes become less progressive when the ability to tax savings is limited

an international review of the implications of regulatory and electricity market structures on the emergence of grid scale electricity storage abstract energy storage systems ess have the potential to make a significant contribution to planning and operation practises in power systems while ess can be used to provide multiple benefits in the power sector widespread use has been restricted by high technology costs lack of deployment experience and the barriers and uncertainties caused by the present electricity market and regulatory structures that were designed for conventional electricity systems this paper reviews countries with high renewable targets and with significant current or planned ess deployments to ascertain the common problems affecting the use of ess on the grid and to establish where changes have been made or proposed to the electricity market and regulatory frameworks three major problems were identified as the undetermined asset class for ess and unbundled electricity system limiting stakeholders from determining and realising multiple ess benefits low electricity market liquidity and changing market conditions and a lack of common standards and procedures for evaluating connecting operating and maintaining ess based on the established barriers recommendations to update or create policies regulation and market arrangements to increase the viability and wider use of grid level ess are discussed the three key regulatory and policy recommendations were identified as an alignment of renewable policies to that of ess creating a separate asset class for ess and associated rules for regulated and competitive operations and standardising assessment frameworks connection and operational procedures for the use of ess finally three main electricity market recommendations include updating rules to support simultaneous ess operation across wholesale ancillary services and capacity markets updating market rules to allow compensation for flexible and highly accurate responsive demand and generation technologies such as ess and updating market ancillary services energy requirements

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

california s electricity market finally turning the corner rappel historique de la dereglementation du secteur electrique californien et de l impact qu elle a eu sur l approvisionnement en electricite analyse du role et de la politique de la federal energy regulatory commission ferc en matiere de prix de gros et de regulation du marche de l electricite evaluation de ses insuffisances et etude de sa nouvelle politique d assainissement du marche

tax bases tax rates and the elasticity of reported income abstract tax reforms usually change both tax rates and tax bases using a panel of income tax returns spanning the two major u s tax reforms of the 1980s and a number of smaller tax law changes i find that the elasticity of income reported on personal income tax returns depends on the available deductions this highlights that this key behavioral elasticity is not an immutable parameter but rather that it can be to some extent controlled by policy makers one implication is that base broadening reduces the marginal efficiency cost of taxation the results are very similar for all income categories indicating that the rich are more responsive to tax rates because tax rules that apply to them are different their tax base is narrower the point estimates indicate that the tax reform act of 1986 reduced the marginal cost of collecting a dollar of tax revenue with roughly half of this reduction due to the base broadening and the other half due to the tax rate reduction as a by product the analysis in this paper offers a reconciliation of disparate estimates obtained by previous studies of the tax responsiveness of income

the case for a progressive tax from basic research to policy recommendations the fair distribution of the tax burden has long been a central issue in policyhe fair distribution of the tax burden has long been a central issue in policymaking a large academic literature has developed models of optimal tax making a large academic literature has developed models of optimal tax theory to cast light on the problem of optimal tax progressivity in this theory to cast light on the problem of optimal tax progressivity in this paper we explore the path from basic research results in optimal tax theory to paper we explore the path from basic research results in optimal tax theory to formulating policy recommendations formulating policy recommendations models in optimal tax theory typically posit that the tax system should maximize a models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint taking into account social welfare function subject to a government budget constraint taking into account that individuals respond to taxes and transfers social welfare is larger when resources that individuals respond to taxes and transfers social welfare is larger when resources are more equally distributed but redistributive taxes and transfers can negatively are more equally distributed but redistributive taxes and transfers can negatively affect incentives to work save and earn income in the fi rst place this creates the clasaffect incentives to work save and earn income in the fi rst place this creates the classical trade off between equity and effi ciency which is at the core of the optimal income sical trade off between equity and effi ciency which is at the core of the optimal income tax problem in general optimal tax analyses maximize social welfare as a function of tax problem in general optimal tax analyses maximize social welfare as a function of individual utilities the sum of utilities in the utilitarian case the marginal weight for individual utilities the sum of utilities in the utilitarian case the marginal weight for a given person in the social welfare function measures the value of an additional dollar a given person in the social welfare function measures the value of an additional dollar of consumption expressed in terms of public funds such welfare weights depend on of consumption expressed in terms of public funds such welfare weights depend on the level of redistribution and are decreasing with income whenever society values the level of redistribution and are decreasing with income whenever society values more equality of income therefore optimal income tax theory is fi rst a normative more equality of income therefore optimal income tax theory is fi rst a normative theory that shows how a social welfare objective combines with constraints arising from theory that shows how a social welfare objective combines with constraints arising from limits on resources and behavioral responses to taxation in order to derive specifi c limits on resources and behavioral responses to taxation in order to derive specifi c

taxation and top incomes in canada we estimate the elasticity of reported income with respect to tax rates for high earners using sub national variation across canadian provinces we argue this allows for better identification of tax elasticities than the existing literature we find that elasticities of reported income at the provincial level are large for incomes in the top 1 but small for lower earners there are strong indications that the response happens both through earned and capital income while our estimated elasticities are large changes in tax rates cannot explain much of the overall long run trend of higher income concentration in canada resume fiscalite et revenus les plus eleves au canada les auteurs evaluent l elasticite du revenu declare par rapport aux taux d imposition pour les revenus les plus eleves en utilisant les variations intra nationales a travers les provinces du canada ils suggerent que cela produit une meilleure identification des elasticites que ce que contient la litterature pour le moment on decouvre que les elasticites du revenu declare sont elevees pour les 1 au sommet mais faibles pour les revenus plus bas il appert fortement que la reponse se produit tant pour les revenus gagnes que pour les revenus d investissement meme si les elasticites mesurees sont elevees les changements dans les taux d imposition ne peuvent pas expliquer beaucoup de la tendance a long terme vers une plus forte concentration des hauts revenus au canada

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

instability and concentration in the distribution of wealth abstract we consider a setup in which infinitely lived households face idiosyncratic investment risk and show that in this case the equilibrium distribution of wealth becomes increasingly right skewed over time until wealth concentrates entirely at the top the households in our setup are identical in terms of their patience and their abilities and we assume that there are no redistributive mechanisms neither explicit in the form of government tax or fiscal policies nor implicit in the form of limited intergenerational transfers our results demonstrate that the presence of such redistributive mechanisms alone ensures the stability of the distribution of wealth over time

the elasticity of taxable income evidence and implications abstract a central tax policy parameter that has recently received much attention but about which there is substantial uncertainty is the overall elasticity of taxable income we provide new estimates of this elasticity which address identification problems with previous work by exploiting a long panel of tax returns to study a series of tax reforms throughout the 1980s this identification strategy also allows us to provide new evidence on both the income effects of tax changes on taxable income and on variation in the elasticity of taxable income by income group we find that the overall elasticity of taxable income is approximately 0 4 the elasticity of real income not including tax preferences is much lower we estimate small income effects of tax changes on reported income implying that the compensated and uncompensated elasticities of taxable income are very similar we estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above 100 000 per year who have an elasticity of 0 57 while for those with incomes below 100 000 per year the elasticity is less than one third as large moreover high income taxpayers who itemize are particularly responsive to taxation our estimates suggest that optimal tax structures may feature tightly targeted transfers to lower income taxpayers and a flat or even declining marginal rate structure for middle and high income taxpayers

time poor working super rich abstract this paper revisits the standard model of labor supply under two additional assumptions consumption requires time and some limited amount of work is enjoyable whereas introducing each assumption without the other one does not produce novel insights combining them together does if the wage rate is sufficiently high for top earners work has a positive marginal utility at the optimum and above a critical wage level it converts into a pure consumption good their labor supply curve is first backward bending and then vertical this can justify an optimal marginal tax rate on top incomes equal to 100 top earners in the vertical half line of the labor supply curve optimally refrain from spending their entire income at the macroeconomic level this can generate a lack of effective demand with some qualifications these findings carry over to models that include savings and philanthropy

millionaire migration and taxation of the elite evidence from administrative data a growing number of u s states have adopted millionaire taxes on top income earners this increases the progressivity of state tax systems but it raises concerns about tax flight elites migrating from high tax to low tax states draining state revenues and undermining redistributive social policies are top income earners transitory millionaires searching for lower tax places to live or are they embedded elites who are reluctant to migrate away from places where they have been highly successful this question is central to understanding the social consequences of progressive taxation we draw on administrative tax returns for all million dollar income earners in the united states over 13 years tracking the states from which millionaires file their taxes our dataset contains 45 million tax records and provides census scale panel data on top income earners we advance two core analyses 1 state to state migration of millionaires over the long term and 2 a sharply focused discontinuity anal