Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas

doi:10.3982/ecta14681

Cited by 79 publications

(75 citation statements)

References 64 publications

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“…to the labor supply responses. To obtain an expression for these wage changes and hence obtain a closed form solution, we follow Sachs, Tsyvinski, and Werquin (2020) and formalize the associated fixed point in terms of integral equations. 18 First, note that these equilibrium wage changes can be divided into the effects arising from immigrant inflows, low-skilled native labor supply responses, and high-skilled native labor supply responses as…”

Section: Incorporating Endogenous Native Labor Supplymentioning

confidence: 99%

“…Further, these labor supply responses themselves induce wage effects which mitigate the initial wage shocks. Following Sachs, Tsyvinski, and Werquin (2020), we formalize the implied fixed point problem in terms of integral equations and show that the indirect fiscal effect can be expressed as a closed-form expression of estimable statistics: own-wage elasticities, income-weighted averages of (i) labor supply elasticities, (ii) marginal effective tax rates, as well as (iii) products of participation (marginal) tax rates and extensive (intensive) marginal labor supply elasticities -all conditional on skill level. Component (i) captures mitigation of wage effects by native labor supply responses.…”

Section: Introductionmentioning

confidence: 99%

“…Sachs, Tsyvinski, and Werquin (2020) study nonlinear tax reforms in a general equilibrium setting with endogenous labor supply and also highlight that a decrease in the skill ratio can trigger tax revenue effects in the case of progressive taxation.…”

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confidence: 99%

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The Indirect Fiscal Benefits of Low-Skilled Immigration

Colas¹,

Sachs²

2020

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Low-skilled immigrants indirectly affect public finances through their effect on native wages & labor supply. We operationalize this general-equilibrium effect in the workhorse labor market model with heterogeneous workers and intensive and extensive labor supply margins. We derive a closed-form expression for this effect in terms of estimable statistics. We extend the analysis to various alternative specifications of the labor market and production that have been emphasized in the immigration literature. Empirical quantifications for the U.S. reveal that the indirect fiscal benefit of one low-skilled immigrant lies between $770 and $2,100 annually. The indirect fiscal benefit may outweigh the negative direct fiscal effect that has previously been documented. This challenges the perception of low-skilled immigration as a fiscal burden.

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Section: Incorporating Endogenous Native Labor Supplymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Indirect Fiscal Benefits of Low-Skilled Immigration

Colas¹,

Sachs²

2020

Preprint

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“…Not for Redistribution in a dynamic setting with individual savings and bequests. Other papers have also relaxed the assumption of fixed wages and considered the optimal schedule in a general equilibrium context (Sachs, Tsyvinski, and Werquin, 2016).…”

Section: A Optimal Income Tax Theorymentioning

confidence: 99%

Are Elasticities of Taxable Income Rising?

et al. 2018

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This paper assesses a possible explanation for the global downward trend in top personal income tax rates over the last decades: globalization and the related tax evasion and avoidance opportunities could have raised elasticities of taxable income, which would imply lower optimal tax rates. The paper estimates elasticities of taxable income for top income earners using a large sample of economies and years with a common method, allowing an analysis of trends in such elasticities. The paper finds that elasticities do not appear to exhibit any clear pattern over the years. The downward trend in tax rates must have other possible explanations, which are briefly discussed.

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“…Sonnenschein (1981,1982) and Artzner, Simon, and Sonnenschein (1986) derive a heat equation as a gradient process of the firms adjusting the commodity they produce by maximizing the 4 See, e.g., Saez (2001), Kreiner (2006), andGolosov, Tsyvinski, andWerquin (2014) for the methodology; Saez (2009) andJacquet andLehmann (2015) for the analysis of the multidimensional types; and Bierbrauer and Boyer (2018) for the political economy context; Sachs, Tsyvinski, and Werquin (2016) and Scheuer and Werning (2016) for the analysis in general equilibrium; and Saez and Stantcheva (2018) for capital income taxation. rate of change in profit subject to a quadratic cost of adjustment.…”

Section: Introductionmentioning

confidence: 99%

Tax Mechanisms and Gradient Flows

Steinerberger¹,

Tsyvinski²

2019

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We demonstrate how a static optimal income taxation problem can be analyzed using dynamical methods. Specifically, we show that the taxation problem is intimately connected to the heat equation. Our first result is a new property of the optimal tax which we call the fairness principle. The optimal tax at any income is invariant under a family of properly adjusted Gaussian averages (the heat kernel) of the optimal taxes at other incomes. That is, the optimal tax at a given income is equal to the weighted by the heat kernels average of optimal taxes at other incomes and income densities. Moreover, this averaging happens at every scale tightly linked to each other providing a unified weighting scheme at all income ranges. The fairness principle arises not due to equality considerations but rather it represents an efficient way to smooth the burden of taxes and generated revenues across incomes. Just as nature wants to distribute heat evenly, the optimal way for a government to raise revenues is to distribute the tax burden and raised revenues evenly among individuals. We then construct a gradient flow of taxes -a dynamic process changing the existing tax system in the direction of the increase in tax revenues -and show that it takes the form of a heat equation. The fairness principle holds also for the short-term asymptotics of the gradient flow, where the averaging is done over the current taxes. The gradient flow we consider can be viewed as a continuous process of a reform of the nonlinear income tax schedule and thus unifies the variational approach to taxation and optimal taxation. We present several other characteristics of the gradient flow focusing on its smoothing properties. * S.S. is supported by the NSF (DMS-1763179) and the Alfred P. Sloan Foundation. † We thank

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Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Cited by 79 publications

References 64 publications

The Indirect Fiscal Benefits of Low-Skilled Immigration

The Indirect Fiscal Benefits of Low-Skilled Immigration

Are Elasticities of Taxable Income Rising?

Tax Mechanisms and Gradient Flows

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