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on Public Finance |
| By: | Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan |
| Abstract: | Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts, focusing on male workers. We construct a life cycle model in which individuals decide each period whether to go to school, work, or stay non-employed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. Consistent with the model, we empirically document that countries with more progressive labor income tax schedules have (i) significantly lower before-tax wage inequality at different points in time and (ii) experienced a smaller rise in wage inequality since the early 1980s. We then study the calibrated model and find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 84% of the difference in inequality at the upper end (log 90-50 differential). In a two-country comparison between the US and Germany, the combination of skill-biased technical change and changing progressivity of tax schedules explains all the difference between the evolution of inequality in these two countries since the early 1980s. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-20&r=pub |
| By: | Juan Carlos Conesa; Carlos Garriga |
| Abstract: | Policymakers often use measures of tax incidence (generational accounts) as criteria for policy selection. We use a quantitative model of optimal intergenerational policy to evaluate the ability of the tax incidence metric to capture the identity of recipients and contributors and the magnitudes transferred. The analysis suggests that when the reform implies a substantial change in economic efficiency, the tax metric fails to identify the magnitude of the welfare changes and those who benefit from those who pay. In contrast, when the policies evaluated imply only intergenerational redistribution, the metric correctly identifies winners and losers and provides reasonable estimates of the magnitude of welfare changes. |
| Keywords: | Taxation ; Fiscal policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-016&r=pub |
| By: | Cagri Seda Kumru; Saran Sarntisart |
| Abstract: | Self-control problem is an important determinant of individuals. economic decisions. The decision maker’s future utility is affected by unwanted temptation. This implies that implications of various government policies would differ if one incorporates these behavioural aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. The purpose of this paper is to examine the question of optimal taxation when individuals have self-control problems. In order to capture our agents’ temptation towards current consumption, our model make use of the preference structure pioneered by Gul and Pesendorfer and further elaborated by Krusell et al. in the context of optimal taxation. We extend by adding labor choice and besides savings tax, we also analyze capital income tax, consumption tax and labor income tax. Results show that when the analysis is restricted to logarithmic preferences separable in consumption and labor supply, the government should subsidize either capital income or investment as it maximizes both an individual’s commitment utility for consumption and labor supply at the same time. Because individuals consume and supply labor more than their commitment utility, subsidizing improves welfare as it makes temptation less attractive. |
| Keywords: | Temptation; self-control; consumption-savings; optimal taxation |
| JEL: | E21 E62 H21 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-609&r=pub |