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  • 1
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    Zurich: University of Zurich, Department of Economics
    Publication Date: 2018-06-28
    Description: We study Pareto optimal tax and education policies when human capital upon labor market entry is endogenous and individuals face wage uncertainty. Though optimal labor distortions are history-dependent, i.e. depend on income and education, simple policy instruments can yield the desired distortions: a single nonlinear labor income tax schedule combinedwith income-contingent loans. To take themodel to the (US) data, we simplify the model to a binary education decision (graduating from college or not). We find that for lowand intermediate incomes the labor supply decision of college graduates should be distorted more heavily than for individuals without a college degree. As a consequence, the optimal student loan repayment schedule increases in income for this range. This result holds along the Pareto frontier. We compare the second best to a situation where loan repayment is restricted to be independent from income and find significant welfare gains.
    Keywords: H21 ; H23 ; I21 ; ddc:330 ; Optimal dynamic taxation ; Education ; Implementation ; Bildungsverhalten ; Bildungsertrag ; Erwerbsverlauf ; Einkommensteuer ; Optimale Besteuerung ; Pareto-Optimum ; Allgemeines Gleichgewicht ; USA
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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  • 2
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2018-11-27
    Description: The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to the implied change in their distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through higher labor supply of (non-)heirs.
    Keywords: C68 ; D91 ; H22 ; H31 ; J22 ; ddc:330 ; bequest ; taxation ; life-cycle ; labor-supply ; dynamic scoring
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 3
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2018-11-27
    Description: We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.
    Keywords: H21 ; H23 ; I22 ; I24 ; I28 ; ddc:330 ; financial aid ; college subsidies ; optimal taxation ; inequality
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 4
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2016-11-05
    Description: We analyze Pareto-efficient tax breaks for work-related expenses in a Mirrleesian environment. Individuals are heterogenous in their ability. In addition to a labor-leisure choice, they decide how to spend their money between normal consumption and work-related goods. We derive an efficiency condition that relates the (implicit) subsidy rate for work-related goods to the marginal tax rate. Importantly, the condition holds irrespective of the skill distribution and the taste for redistribution. If the efficiency condition is violated, we show how to Pareto improve such allocations. For the special and policy-relevant case where goods contribute to the time available for market work (e.g., domestic services, child care or care for elderly relatives, health investment), we demonstrate that any tax system without a tax break for such goods can be improved in a Pareto sense. Pareto improvements are also possible if time-enhancing expenses are fully deductible from taxable income.
    Keywords: D82 ; H21 ; ddc:330 ; optimal taxation ; tax deduction ; Pareto improving tax reform
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 5
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2016-11-05
    Description: We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.
    Keywords: H20 ; H21 ; H22 ; ddc:330 ; nonlinear tax policy ; tax incidence ; optimal taxation ; general equilibrium
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 6
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    ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
    Publication Date: 2016-05-23
    Description: We study optimal nonlinear taxation of labor income and linear taxation of capital income in a life-cycle framework with private information and idiosyncratic risk. We focus on simple history-independent tax instruments. We first analyze the welfare losses from this simplification as compared to optimal history-dependent policies. We find very small losses from restricting the complexity of savings wedges. Eliminating history dependence of labor wedges leads to larger welfare losses: moving from history dependence to age dependence yields approximately the same welfare losses as moving from age dependence to age independence and from nonlinear to linear income taxation. For optimal history- independent taxes, we provide a novel decomposition into a redistribution and an insurance component and a generalization of the top tax formula to dynamic environments. Capital taxation is desirable and yields sizable welfare gains, especially if labor income taxes are set below their optimal level.
    Keywords: H21 ; H20 ; H23 ; ddc:330
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 7
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    Mannheim: University of Mannheim, Department of Economics
    Publication Date: 2018-06-01
    Description: We study the implications of limited commitment on education and tax policies chosen by benevolent governments. Individual wages are determined by both innate abilities and education levels. Consistent with real world practices, the government can decide to subsidize different levels of education at different rates. Deviations from full commitment tend to make education policies more progressive, increasing the education subsidy for initially low skilled agents and decreasing it for initially high skilled agents. We provide suggestive cross-country correlations for this mechanism.
    Keywords: H21 ; H23 ; I21 ; ddc:330 ; Education Policies ; Time-Inconsistency ; Taxation ; Inequality
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 8
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    Mannheim: University of Mannheim, Department of Economics
    Publication Date: 2018-06-01
    Description: The total social benefits of college education exceed the private benefits because the government receives a share of the monetary returns in the form of income taxes. We study the policy implications of this fiscal externality in an optimal dynamic tax framework. Using a variational approach we derive a formula for the revenue effect of an increase in college education subsidies and for the excess burden of income taxation caused by the college margin. We also show how the optimal nonlinear income tax problem is altered by the college margin. Our modeling assumptions are strongly guided by the recent structural labor literature on college education. The model incorporates multidimensional heterogeneity, idiosyncratic risk and borrowing constraints. The model matches key empirical results on college enrollment patterns, returns to education and enrollment elasticities. Quantitatively, we find that a marginal increase in college subsidies in the US is at least 70 percent self-financing through the net-present value increase in future tax revenue. When targeting this increase to children in the lowest parental income tercile, it is even up to 165 percent self-financing. The excess burden of income taxation is only slightly altered by the college margin and therefore the optimal Mirrleesian income tax schedule is barely affected as well, in particular if subsidies are set at their optimal level.
    Keywords: H21 ; H23 ; I22 ; I24 ; I28 ; ddc:330 ; Optimal Taxation ; College Subsidies ; College Enrollment ; Tax Reforms
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 9
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    Mannheim: University of Mannheim, Department of Economics
    Publication Date: 2018-06-01
    Description: 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.
    Keywords: H21 ; H23 ; ddc:330 ; Optimal Dynamic Taxation ; Capital Taxation ; First-Order Approach
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 10
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    Trier: Universität Trier, Fachbereich IV – Volkswirtschaftslehre
    Publication Date: 2019-01-22
    Description: We characterize the solution to the optimal nonlinear income taxation problem if individuals face a minimum hours constraint that gives rise to labor supply responses along the extensive margin. We provide conditions for optimal marginal tax rates to be positive everywhere and derive a formula for the optimal participation taxes. This formula shows the additional forces in comparison to the pure extensive labor supply model, can easily be generalized to other contexts of extensive and intensive labor supply responses, and provides a new condition under which an Earned Income Tax Credit (EITC) can be ruled out. In addition, we develop a test for the second-best Pareto-efficiency of any income tax schedule. The test is ex- pressed in reduced form and can be applied if the income distribution and empirical estimates of the extensive and intensive labor supply elasticities are known. Carefully parameterized simulations suggest that an EITC is optimal. An exogenous restriction that the welfare benefit cannot be set below a certain level causes the EITC to be less pronounced. On the other hand, exogenous government revenue requirements cause the EITC to be more pronounced in relative terms, because the welfare benefit decreases while the participation subsidy remains fairly constant. However, with the restriction of a fixed welfare benefit an increase in revenue requirements leads to a sharp decline of the participation subsidy.
    Keywords: H21 ; H23 ; ddc:330 ; Optimal taxation ; participation taxes ; extensive margin ; intensive margin
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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