Optimal Tax Progressivity: An Analytical Framework

Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L.

doi:10.3386/w19899

Cited by 142 publications

(298 citation statements)

References 3 publications

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“…The first consists of simply shutting down the endogenous reassignment channel in the former model while keeping all of the other parameters unchanged, hence assuming a Cobb–Douglas production function over skills (

σ = 1

). The second, more relevant, calibration consists of directly estimating a CES production function over labor supplies: we then use the value

σ = 3.1

estimated by Heathcote, Storesletten, and Violante ().…”

Section: Environmentmentioning

confidence: 99%

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Sachs¹,

Tsyvinski

Werquin

2020

ECTA

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We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general‐equilibrium “trickle‐down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.

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σ = 1

). The second, more relevant, calibration consists of directly estimating a CES production function over labor supplies: we then use the value

σ = 3.1

estimated by Heathcote, Storesletten, and Violante ().…”

Section: Environmentmentioning

confidence: 99%

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Sachs¹,

Tsyvinski

Werquin

2020

ECTA

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“…Based on the same tax schedule function of this study, Heathcote, Storesletten, and Violante () find the similar value of the progressivity parameter.…”

mentioning

confidence: 70%

The Heterogeneous Responses of Consumption between Poor and Rich to Government Spending Shocks

Ma¹

2018

J of Money Credit Banking

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Government spending shocks have substantially different effects on consumers across the income distribution: consumption increases for the poor whereas it decreases for the rich in response to a rise in government expenditure. I shed light on this issue by incorporating a progressive tax scheme and productive public expenditure into a heterogeneous agent model economy with indivisible labor. The model economy is able to successfully match aggregate and disaggregate effects of government spending shocks on consumption. When the government increases its spending and accompanies it by a rise in tax progressivity, the poor are employed and increase their consumption since after‐tax wage rates increase while the rich decrease their consumption because of a fall in after‐tax wage rates.

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“… The tax function in Equation has also been estimated by Heathcote, Storesletten, and Violante () and Guner, Lopez‐Daneri, and Ventura () for the U.S. The OECD tax and benefit calculator, the source of our data, reports net income after taxes and includes most direct transfers to households.…”

mentioning

confidence: 99%

“…The OECD tax and benefit calculator, the source of our data, reports net income after taxes and includes most direct transfers to households. Like us, Heathcote, Storesletten, and Violante () estimate the tax function net of transfers. They use tax data from the NBER TAXSIM in combination with the PSID to obtain data on taxes and transfers, and estimate

θ_{1}^{normalUS} = 0.181

, slightly higher than our estimate of the progressivity parameter of

θ_{1}^{normalUS} = 0.137

from Table .…”

mentioning

confidence: 99%

“…They use tax data from the NBER TAXSIM in combination with the PSID to obtain data on taxes and transfers, and estimate

θ_{1}^{normalUS} = 0.181

, slightly higher than our estimate of the progressivity parameter of

θ_{1}^{normalUS} = 0.137

from Table . The reason for the higher number in Heathcote, Storesletten, and Violante () is likely that their data allows them to include a more complete measure of transfers. Guner, Lopez‐Daneri, and Ventura (), in contrast estimate the tax function on IRS income tax data which do not include transfers, and obtain a significantly smaller value of tax progressivity,

θ_{1}^{normalUS} = 0.053

.…”

mentioning

confidence: 99%

See 1 more Smart Citation

How do tax progressivity and household heterogeneity affect Laffer curves?

Holter

Krueger

Stepanchuk

2019

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How much additional tax revenue can the government generate by increasing the level of labor income taxes? In this paper, we argue that the degree of tax progressivity is a quantitatively important determinant of the answer to this question. To make this point, we develop a large scale overlapping generations model with single and married households facing idiosyncratic income risk, extensive and intensive margins of labor supply, as well as endogenous accumulation of human capital through labor market experience. We calibrate the model to U.S. macro, micro, and tax data and characterize the labor income tax Laffer curve for various degrees of tax progressivity. We find that the peak of the U.S. Laffer curve is attained at an average labor income tax rate of 58normal%. This peak (the maximal tax revenues the government can raise) increases by 7normal% if the current progressive tax code is replaced with a flat labor income tax. Replacing the current U.S. tax system with one that has Denmark' s progressivity would lower the peak by 8normal%. We show that modeling the extensive margin of labor supply and endogenous human capital accumulation is crucial for these findings. With joint taxation of married couples (as in the U.S.), higher tax progressivity leads to significantly lower labor force participation of married women and substantially higher labor force participation of single women, an effect that is especially pronounced when future wages of females depend positively on past labor market experience.

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Optimal Tax Progressivity: An Analytical Framework

Cited by 142 publications

References 3 publications

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

The Heterogeneous Responses of Consumption between Poor and Rich to Government Spending Shocks

How do tax progressivity and household heterogeneity affect Laffer curves?

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