Browsing by Subject "Optimal Taxation"

Now showing 1 - 4 of 4
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    Essays on Market Incompleteness
    (2015-07) Zouain Pedroni, Marcelo
    This thesis studies incomplete market economies. First from a normative perspective in Chapter 1, then from a positive one in Chapter 2. Chapter 1 studies optimal taxation in an environment where heterogeneous households face uninsurable idiosyncratic risk. To do this, we formulate a Ramsey problem in a standard infinite horizon incomplete markets model. We solve numerically for the optimal path of proportional capital and labor income taxes, (possibly negative) lump-sum transfers, and government debt. The solution maximizes welfare along the transition between an initial steady state, calibrated to replicate key features of the US economy, and an endogenously determined final steady state. We find that in the optimal (utilitarian) policy: (i) capital income taxes are front-loaded hitting the imposed upper bound of 100 percent for 33 years before decreasing to 45 percent in the long-run; (ii) labor income taxes are reduced to less than half of their initial level, from 28 percent to about 13 percent in the long-run; and (iii) the government accumulates assets over time reducing the debt-to-output ratio from 63 percent to -17 percent in the long-run. Relative to keeping fiscal instruments at their initial levels, this leads to an average welfare gain equivalent to a permanent 4.9 percent increase in consumption. Even though non-distortive lump-sum taxes are available, the optimal plan has positive capital and labor taxes. Such taxes reduce the proportions of uncertain and unequal labor and capital incomes in total income, increasing welfare by providing insurance and redistribution. We are able to quantify these welfare effects. We also show that calculating the entire transition path (as opposed to considering steady states only) is quantitatively important. Implementing the policy that maximizes welfare in steady state leads to a welfare loss of 6.4 percent once transitory effects are accounted for. The main determinants of credit limits are the rules that govern the ability of households to default on their loans and the risks that they are exposed to. Chapter 2 investigates the quantitative relevance of these determinants using a version of the incomplete markets life cycle model in which agents are allowed to default on their debt holdings by declaring bankruptcy. I document that credit limits are positively correlated with households' income levels. I then show that the introduction of profile heterogeneity in the households' income processes increases the correlation between income and credit limits. This fact is consistent with the theoretical results established in a simple example. I also show that proportional income punishments or a threshold level of income, such that agents are only allowed to declare bankruptcy only for income levels bellow that threshold, can also be used to generate such a positive correlation. Finally, the main calibration results suggest an important qualification about heterogeneous income profile models: the lower levels of uncertainty implied by these models lead to a severe underestimation of the number of bankruptcy filings.
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    Essays on Nonlinear Environmental Dynamics and the Social Cost of Carbon
    (2020-08) De, Adway
    This thesis studies the role of nonlinear environmental dynamics plays in determining the level and time profile of carbon taxes in different scenarios. In Chapter 1, I combine a standard neoclassical growth model with a state of the art carbon cycle model and compute the optimal taxes. In Chapter 2, I introduce temperature constraints to capture targets set by nations in the Paris Agreement and compute the new constrained optimal carbon taxes. In Chapter 1, I start with a standard neoclassical growth model for the world economy and combine with it a state-of-the art climate model; the climate model explicitly derives the nonlinear dynamics of the carbon cycle from physical laws, as opposed to the standard models with parameterized linear dynamics. This climate model captures nonlinear environmental dynamics that show how the timing and rate of emissions determines atmospheric concentrations of greenhouse gases in the atmosphere. Although such dynamics have been well known in environmental models, it was a challenge to include them in growth models with optimizing agents. I solve the model's nonlinear feedback effects by employing a new numerical solution technique. I found that the social cost of carbon in this framework was only slightly higher than what is estimated in standard models with linear dynamics. This paper provides a tractable formulation for a baseline model such that we can continue updating our environmental models to the best available science and make better policy recommendations. In Chapter 2, I consider the incorporation of temperature constraints into the above model to capture the Paris Agreement targets. After signing the Paris Agreement to limit the rise in global temperature within 2 C, countries are coming up with fiscal policies to limit their carbon emissions. Economic models should inform how to optimally implement these targets but so far have not because the Paris target is infeasible in the benchmark model. This paper challenges that in-feasibility by using the baseline model developed in Chapter 1. My model predicts higher benefits of rapid mitigation policies than the standard carbon cycles used in the literature, which makes the Paris target feasible. After showing the Paris target is feasible, I calculate the optimal taxes to achieve the target. I find that the carbon tax should be $298 in 2020 and should grow at 1.56% per year till 2050, after which it should decline at an average annual rate of 0.5% per year. I also show that capital taxes would be required along with carbon taxes to implement the optimal allocation. Given the state of policies around the world, most countries have much lower carbon taxes and there is a need to drastically increase the tax base and level to achieve the Paris Agreement targets.
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    Essays on redistribution
    (2009-07) Samano-Penaloza, Daniel
    Optimal tax theory has difficulty rationalizing high marginal tax rates at the upper end of the labor income distribution. For instance, in order to obtain positive asymptotic marginal taxes, Diamond (1998) and Saez (2001) need to consider a very particular functional form describing the labor earnings distribution's upper tail. In chapter one, I construct a model of optimal income taxation in which agents display jealousy toward the consumption of others. I derive a simple expression for optimal taxes that accommodates consumption externalities within Mirrlees (1971) framework. I show that only a moderate amount of jealousy toward the rich is sufficient to rationalize the observed labor income taxes in the United States and the United Kingdom. My estimations indicate that the progressivity of actual tax schedules may be highly driven by corrective considerations, particularly at the top of the income distribution. In chapter two, I extend the Mirrlees (1971) framework to incorporate positional goods, that is, goods that are valued relative to other agents' consumption of the same good. Under reasonable parameters describing the magnitude of positional considerations a society may have, my numerical calculations show that a linear tax imposed on the consumption of the positional good is by no means negligible and induces large distributional effects.
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    Essays on the political economy of taxation in dynamic settings.
    (2009-08) Piguillem, Juan Facundo
    In this thesis we explore the relationship between changes in labor income inequality and movements in labor taxes over the last decades in US. In order to do so, we model this link through a political economy channel by developing a median voter result over sequence of taxes. We consider an infinite horizon economy in which agents are heterogeneous with respect to both initial wealth and labor skills. We study indirect preferences over redistributive fiscal policies - sequences of affine taxes on labor and capital income - that can be supported as a competitive equilibrium. The thesis assumes balanced growth preferences and full commitment. The first result is the following: if initial capital holdings are an affine function of skills, then the best fiscal policy for the agent with the median labor skill is preferred to any other policy by at least half of the individuals in the economy. The second result provides the characterization of the most preferred tax sequence by the median agent: marginal taxes on labor depend directly on the absolute value of the distance between the median and the mean value of the skill distribution. In order to analyze the co-movement properties of labor taxes, we extend the above results to an economy in which the distribution of skills evolves stochastically over time. We find that a temporary increase in inequality could imply either higher or lower labor taxes, depending on the sign and level of the correlation between inequality and aggregate labor. We also numerically calculate a calibrated version of the model and we compare the results with the data. The model does a good job on fitting the increasing trend of labor taxes in the last decades and also on matching some short run co-movements. Regarding capital taxation, the bang-bang result holds as in Bassetto and Benhabib (2006). We also generalize the median voter theorem when there is no commitment by adopting the same equilibrium definition as in Bernheim and Slavov (2008).