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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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    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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  • 3
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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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  • 4
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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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  • 5
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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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  • 6
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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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  • 7
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    Bonn: Institute for the Study of Labor (IZA)
    Publication Date: 2018-11-15
    Description: We study optimal tax and educational policies in a dynamic private information economy, in which ex-ante heterogeneous individuals make an educational investment early in their life and face a stochastic wage distribution. We characterize labor and education wedges in this setting analytically and numerically, using a calibrated example. We present ways to implement the optimum. In one implementation there is a common labor income tax schedule, and a repayment schedule for government loans given out to agents during education. These repayment plans are contingent on loan size and income and capture the history dependence of the labor wedges. Applying the model to US-data and a binary education decision (graduating from college or not) we characterize optimal labor wedges for individuals without college degree and with college degree. The labor wedge of college graduates as a function of income lies first strictly above their counterparts from high-school, but this reverses at higher incomes. The loan repayment schedule is hump-shaped in income for college graduates.
    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
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  • 8
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    Unknown
    Kiel und Hamburg: ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
    Publication Date: 2015-05-08
    Description: We study education and income tax policies in a model with endogenous selection into college. Our framework is strongly influenced by the empirical college literature and incorporates heterogenous returns and tastes for college, earnings risk (implying uncertain returns to college) and potentially borrowing constraints. We (i) calculate revenue effects of various policy reforms starting from the current system and (ii) derive conditions for optimal education and tax policies with various degrees of sophistication: optimal college subsidies for given income taxes and vice versa, jointly optimal taxes and subsidies, and optimal education dependent taxes. We estimate the relevant parameters of the model for quantitative analysis. We find that the endogeneity of the college choice has only a small impact on optimal taxes and increasing subsidies to their optimal level leads to large welfare gains. Finally, we find that for the current US policies, an increase in education subsidies is self-financing via higher tax revenue in the future; if we allow grants to condition on parental background, this effect gets even stronger and children with poor academic background should receive higher subsidies for pure efficiency reasons -- efficient policies favor social mobility.
    Keywords: H21 ; H23 ; I22 ; 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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  • 9
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    Unknown
    Bonn: Institute for the Study of Labor (IZA)
    Publication Date: 2015-08-20
    Description: We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal.
    Keywords: H21 ; H23 ; ddc:330 ; optimal taxation ; capital taxation ; redistribution ; insurance
    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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    Unknown
    Bonn: Institute for the Study of Labor (IZA)
    Publication Date: 2015-08-20
    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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