Preference Heterogeneity and Optimal Capital Taxation

We analytically and quantitatively examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.

De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution

The prominent but unproven intuition that preference heterogeneity reduces re-distribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given mainstream functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.

Seesaws and Social Security Benefits Indexing

The price indexation of Social Security bene.t payments has emerged in recent years as a flashpoint of debate in the United States. I characterize the direct effects that changes in that price index would have on retirees who differ in their initial wealth at retirement and mortality rates after retirement. I propose a simple but flexible theoretical framework that converts benefits reform first into changes to retirees’ consumption paths and then into a net effect on social welfare. I calibrate that framework using recently-produced data on Social Security beneficiaries by lifetime income decile and both existing and new survey evidence on the normative priorities Americans have for Social Security. The results suggest that the value retirees place on protection against longevity risk is an important caveat to the widespread enthusiasm for a switch to a slower-growing price index such as the chained CPI-U

The Promise of Positive Optimal Taxation

At the heart of modern optimal tax research is the assumption that the objective of taxation is Utilitarian. I present new survey evidence that most people disagree with this assumption, preferring tax policies based at least in part on a classic alternative objective: the principle of Equal Sacrifice. I generalize the standard model to accommodate this preference for a mixed objective, proposing a method by which to make disparate criteria commensurable while respecting Pareto efficiency. Then, I show that optimal policy in this generalized model, calibrated to the survey evidence and U.S. microdata, quantitatively matches several features of existing tax policy that are incompatible in the conventional model but widely endorsed in reality, including the coexistence of substantial redistribution and limited tagging. Together, these findings demonstrate the potential of a positive theory of optimal taxation

Dynamic Scoring: A Back-of-the-Envelope Guide

This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply, departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.

The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution

Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay$4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice.

Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children' s Abilities Depend on Parents' Resources

Empirical research suggests that parents’ economic resources affect their children’s future earnings abilities. Optimal tax policy therefore will treat future ability distributions as endogenous to current taxes. We model this endogeneity, calibrate the model to match estimates of the intergenerational transmission of earnings ability in the United States, and use the model to simulate optimal policy numerically. Optimal policy is more redistributive toward low-income parents than existing U.S. tax policy. The optimal policy increases the probability that low-income children move up the economic ladder, generating a present-value welfare gain of 1.28% of consumption in our baseline case

Preference Heterogeneity and Optimal Capital Income Taxation

We analytically and quantitatively examine a prominent justi.cation for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and .nd that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.JCKNMLNHOGJE

Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions

Calculating the welfare implications of changes to economic policy or shocks to the economy requires economists to decide on a normative criterion. One way to make that decision is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference exercise as in, for example, the recent surge of so-called “inverse-optimum” research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse- optimum inference on U.S. tax policy from 1979 through 2010 and identify two broad explanations for its evolution. These explanations, however, either undermine the reliability of the inference exercise's conclusions or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations. We emphasize the need for better evidence on society's positive and normative judgments in order to resolve the questions these findings raise

Dynamic Scoring: A Back-of-the-Envelope Guide

This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.Economic