Optimal Dynamic Taxation with Indivisible Labour (original) (raw)
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Optimal Dynamic Labor Taxation
Macroeconomic Dynamics, 2007
We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.
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This paper studies the optimal commodity taxation problem when time taken in consumption is a perfect substitute for either labor or leisure. It shows that while labor substitutability affects the optimal tax structure, leisure substitutability leaves the classical optimal tax results intact. In the Ramsey tax framework with linear income taxes, whether the consumers have the same or different earning abilities, labor substitutes tend to be taxed at a higher rate than leisure substitutes with the tax differential being increasing in consumption time. This is not necessarily the case when one allows for nonlinear income taxation.
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We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply that relaxes the standard assumption of strong separability within periods. Our model permits identification of both within-period preference parameters and lifecycle preference parameters such as the inter-temporal substitution elasticity. Results indicate that consumption and hours worked are direct complements in utility, and both increase with an increase in the after-tax share and with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double the standard estimates for men in the United States that ignore within-period non-separability between consumption and hours and rely on linear preferences. Given our estimated inter-temporal elasticity of substitution of about-0.96, the Frisch specific substitution elasticities of consumption and labor supply with respect to the after-tax wage are about 0.1 and 0.5, indicating significant inter-temporal smoothing of utility. Depending on consumption measure, static estimates of the marginal welfare cost of revenue-neutral taxation are 6-20 percent, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed.
1999
This paper reviews the recent optimal dynamic tax literature, and links the results from dynastic one-person economies, dynastic heterogeneous individual economies and overlapping generations economies. The paper shows that the second best labour tax is positive, and further analyses the dynamic paths of capital and labour taxes, as well as the economy's adjustment under the optimal programme. Furthermore, we prove that in a heterogeneous individual economy, every individual's most preferred capital tax in steady state is zero. The optimal labour tax in a heterogeneous individual framework is similar to the optimal labour tax in a one-person economy.
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Journal of Public Economics, 2008
Recent advances in dynamic Mirrlees economies have incorporated the treatment of human capital investments as an important dimension of government policy. This paper adds to this literature by considering a two period economy where agents are differentiated by their preferences for leisure and their productivity, both private information. The fact that productivity is only learnt later in an agent's life introduces uncertainty to agent's savings and human capital choices and makes optimal the use of multi-period tie-ins in the mechanism that characterizes the government policy. We show that optimal policies are often interim inefficient and that the introduction of these inefficiencies may take the form of marginal tax rates on labor income of varying sign and educational policies that include the discouragement of human capital acquisition. With regards to implementation, state-dependent linear taxes implement optimal savings, while human capital policies may require labor income taxes that depend directly on agents' schooling.
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SSRN Electronic Journal, 2009
This article studies the equivalence between labor and consumption taxes in a stochastic context, where the government can undertake an active portfolio management strategy by investing in both risk-free and risky assets. Using a two-period model we have shown that such taxes let consumers make the same decisions and can finance the same amount of government spending in each period. I wish to thank Enrico Minelli for helpful comments. I am responsible for any remaining errors.
The Scandinavian Journal of Economics, 2013
Previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons. This paper considers a two-type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both the high-ability and the low-ability type, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component, i.e., a component that is larger for the high-ability than for the low-ability type. Moreover, leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen.
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2006
Macroeconomic impacts of consumption and income taxes are higher when both of them rather than only one of them are employed to raise a fixed amount of revenue that is given back to households as transfers. We apply a general equilibrium model to assess no tax, only consumption tax or only labour income tax policy alternatives in comparison to a benchmark economy in which both taxes apply to the consumption and labour income of a representative household in an economy. We find that switching to only consumption tax would improve efficiency while raising the target level revenue than in the mix of two tax case. These gains are about 80 percent of the no tax scenario. Taxing only on consumption to raise a given amount of revenue is better in terms of labour supply, lower optimal tax rates and level of utility of the household from consumption and leisure. Model applied to the UK also confirms that the consumption taxes have significantly lower burden than the labour income tax or of the combination of both consumption and labour income taxes.
TAX RATES AND LABOR SUPPLY IN FISCAL EQUILIBRIUM
Economic Inquiry, 1989
A central tenet of supply-side economics is that a balanced-budget reduction in the marginal tax rate on wage income increases aggregate labor supply. In contrast, the orthodox Keynesian analysis concludes that the relationship between tax rates and the economy-wide supply of labor is theoretically ambiguous. Our analysis of a general model reveals that these two propositions are associated, respectively, with the special assumptions of “compensated independence” and “ordinary independence” between leisure and public spending.
Effects of flat-rate taxes: to what extent does the leisure specification matter?
Review of Economic Dynamics, 2003
This paper explores the implications that the specification of the leisure activity has on the effects of alternative forms of taxation in a two-sector endogenous growth model of the U.S. economy. Growth and welfare effects of tax reforms are shown to depend markedly on the leisure specification. We also compute the optimal tax structure of factor incomes and consumption taxation. The optimal tax rate on capital income is rather robust to the leisure specification. However, the balance between consumption and labor income taxation and the effects of shifting to the optimal tax structure vary considerably across leisure specifications.