Endogenous Credit Constraints, Human Capital Investment and Optimal Tax Policy

This paper employs a two-period life-cycle model to derive the optimal tax policy when educational investments are subject to credit constraints. Credit constraints arise from the limited commitment of debitors to repay loans and are endogenously determined by private banks under the non-default condition that individuals can-not be better off by defaulting. We show that the optimal redistributive taxation trades the welfare gain of reducing borrowing demand and of changing the credit constraints against the efficiency costs of distorting education and labor supply. In addition, we compare the optimal taxation with that when credit constraints are taken as given. If income taxation decreases (increases) the borrowing limit, taking credit constraints as given leads to a too high (low) labor tax rate. Thus, ignoring the effects of tax policy on credit constraints overestimates (underestimates) the welfare effects of income taxation. Numerical examples show that income taxation tightens the credit constraints and the optimal tax rates are lower when credit constrains are endogenized. The intuition is that redistributive taxation reduces the incentive to invest in education and to work, thus exaggerating the moral hazard problems associated with credit constraints.labor taxation, human capital investment, credit constraints

Efficient Labor and Capital Income Taxation over the Life Cycle

This paper analyzes Pareto optimal taxation of labor and capital income in a lifecycle framework with private information and idiosyncratic risk. We focus on historyindependent tax systems. We thereby complement the Mirrlees taxation literature, which has so far typically either characterized optimal history-dependent distortions or focused on static environments. For labor income taxes, we provide a novel decomposition of tax formulas into a redistribution and an insurance component. The latter is independent of redistributive motives and is determined by the degree of income risk and risk aversion. We show that the optimal linear capital tax rate is non-zero and derive a simple formula, which trades off redistributive and insurance benefits against the efficiency loss from savings distortions. Our quantitative results show that the insurance component contributes significantly to optimal labor tax rates. Optimal capital taxes are significant and yield sizable welfare gains

Optimal Redistributive Tax and Education Policies in General Equilibrium

Should a redistributive government optimally subsidize education to provoke a reduction in the skill premium through general equilibrium effects on wages? To answer this question, this paper studies optimal linear and non-linear redistributive income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Under optimal linear policies, education should not be subsidized so as to reduce the skill premium. Linear income taxes are distributionally equivalent to (negative) linear education subsidies, but linear taxes do not distort investment in human capital, whether general equilibrium effects are present or not. If skilled labor supply is more elastic than unskilled labor supply, optimal redistributive linear income taxes are lowered as the distributional gains of linear taxes are offset by a rise in the skill premium. Moreover, the optimal linear income tax may even become negative if general equilibrium effects are sufficiently strong. Under non-linear taxation, governments can directly steer the skill premium by exploiting non-linearities in the policy schedules. At the top, the optimal marginal income tax rate is negative, and the optimal marginal education subsidy is positive. At the bottom, the optimal marginal income tax rate is positive, and education is optimally taxed at the margin. Hence, optimal non-linear tax and education policies compress wage differentials, which contributes to redistribution. Simulations show that the top rate and marginal education subsidies are close to zero for a wide range of plausible parameters. Only when high-ability and low-ability workers are rather poor substitutes in production, marginal education subsidies on the high type and marginal education taxes on the low type substantially differ from zero.human capital, general equilibrium, education subsidies, optimal taxation, direct and indirect redistribution

Tax smoothing with redistribution

We study optimal labor and capital taxation in a dynamic economy subject to government expenditure and aggregate productivity shocks. We relax two assumptions from Ramsey models: that a representative agent exists and that taxation is proportional with no lump-sum tax. In contrast, we capture a redistributive motive for distortive taxation by allowing privately observed differences in relative skills across workers. We consider two scenarios for tax instruments: (i) taxation is linear with arbitrary intercept and slope; and (ii) taxation is non-linear and unrestricted as in Mirrleesian models. Our main result provides conditions for perfect tax smoothing: marginal taxes on labor income should remain constant over time and invariant to shocks. In addition, capital should not be taxed. We also discuss implications for optimal debt management. Finally, an extension highlights movements in the distribution of relative skills as a potential source for variations in optimal marginal tax rates.Taxation ; Human capital ; Labor contract

Effects of Redistribution Policies - Who Gains and Who Loses?

The paper combines optimal taxation theory with human capital theory and develops a theoretical model with endogenous wages and education decision, in which redistributive policy experiments are carried out and assessed. It is argued that general equilibrium effects of labor income taxation on wages may counteract fiscal redistribution. It is also shown that education subsidies may only benefit skilled workers, suggesting that this subsidy can merely be viewed as a redistribution from unskilled to skilled individuals. Therefore, optimal policy involves a lump-sum education tax in the form of a negative education subsidy.Income Redistribution; Education Subsidies

Optimal capital income taxation under capital-skill complementarity

This paper analyses the impact of capital-skill complementarity on optimal capital income taxation problem for a redistributive government. We compare an infinite horizon heterogeneous agents incomplete market model in which the technology exhibits capital-skill complementarity to a model in which we keep all the properties of the former but eliminate capital-skill complementarity. We find that under capital-skill complementarity the optimal tax rate on capital income is 0.71, whereas it is 0.24 for the no complementarity case. The former is significantly higher due to extra redistributive channel that results from the relation between capital accumulation and skill premium

Fiscal policy with heterogeneous agents macro

Defence date: 29 March 2023 Examining Board: Árpád Ábrahám (University of Bristol); Alexander Monge-Naranjo (European University Institute, Florence); Jonathan Heathcote (Federal Reserve Bank of Minneapolis); Marek Kapička (CERGE-EI, Prague)This thesis is composed of three essays, and contributes to the literature on optimal design of tax and transfers schemes in heterogeneous agents general equilibrium models. In the first chapter, Redistributive Capital Taxation Revisited, coauthored with Ctirad Slavik and Hakki Yazici, we use a rich quantitative model with endogenous skill acquisition to show that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 67%, while it is 61% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.84 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a redistributive government should take into account capital-skill complementarity when taxing capital. In the second chapter, Optimal Taxation of Automation, I focus on the asymmetric effects of automation on labor markets. I provide a general equilibrium model that distinguishes between low-and high-skill automation to study optimal taxation of those technologies. Low-skill (high-skill) automation generates a downward pressure on low-skill (high-skill) wages. Modeling the two types of automation is important as both are empirically relevant, and each has a different impact on wages of workers with different skill types. I calibrate the model to the US economy along several dimensions, and find that for a given level of technology, it is optimal to distort automation adoption in order to compress wage inequality and increase labor share of income to provide redistribution. In particular, it is optimal to tax low-skill automation while subsidize high-skill automation when the transitional dynamics are taken into account. As a result, consumption inequality and both before and after-tax income inequality decline and labor share of income increases relative to status-quo over transition. In the third chapter, On the Implications of Unemployment Insurance and Universal Basic Income in a Frictional Labor Market, I revisit the efficiency and equality considerations regarding the optimal provision of unemployment insurance (UI) benefits when workers’ outside options vary substantially. The chapter aims to make comparisons between UI and universal basic income (UBI) policies to investigate whether UBI could be a tool to improve workers’ hand in the wage setting and how transfers to unemployed -UI or UBI - and taxes impact the wage setting outcome across income distribution.-- 1. Redistributive capital taxation revisited -- 2. Optimal taxation of automation -- 3. On the implications of unemployment insurance and universal basic income in a frictional labor market -- A. Apendix to Chapter

Are Education Subsidies an Efficient Redistributive Device?

We argue that promoting education may be a means to re- duce income inequality. When workers of different skilllevels are imperfect substitutes in production, an increase in the level of human capital in the economy reduces the return to education and, hence, pre-tax income inequality. The compression of pre- tax wages implies that a given inequality of after-tax incomes can be reached with a less progressive income tax. Optimal redistri- bution policy faces a trade-off between the distortionary effect of progressive income taxation and the distortions arising from education subsidies. The optimal level of education subsidies cru- cially depends on the extent to which education compresses the wage distribution, the distortionary effect of progressive income taxation, and the political desire to redistribute income. We dis- cuss empirical evidence showing that the economy's average years of schooling has a strong effect on pre-tax income inequality. We compute for a number of OECD countries the level of education subsidies that could be justified on redistributive grounds. Our argument for education subsidies goes a long way towards ex- plaining the actual pattern and level of education subsidies in OECD countries

Economic integration and redistribuitive taxation

We set up a simple political economy model where economic integration raises the profitability of multinational firms. In this setting redistributive taxation may rise following economic integration, if the effects of the widened income gap dominate the higher excess burden of the tax

Time-consistent policy and politics: does voting matter when individuals are identical?

We consider the implications of a lack of policy commitment when policies are chosen through a political process and individuals are ex-ante identical. We show that politics, by allowing ex-post distributional tensions to shape policy, can make it possible to sustain non-trivial equilibria in which the commitment problem is alleviated or fully eliminated. How effective politics can be at countering collective commitment problems in homogeneous groups depends on the nature of the political process and on the extent to which private choices are public information