This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects.
H20: Taxation, Subsidies, and Revenue: General
We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. We find that (1) the peak of the model Laffer curve occurs at a 52 percent top tax rate, (2) if human capital were exogenous, then the top of the Laffer curve would occur at a 66 percent top tax rate and (3) applying the theory and methods that Diamond and Saez (2011) use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent.
We study the impact of Connecticut’s Jobs First (JF) welfare reform experiment on the labor supply decisions of a sample of welfare applicants and recipients. Although the experiment identifies the distribution of choices made in the absence and presence of reform, each woman’s counterfactual choice is unknown. We show that economic theory restricts the set of counterfactual choices compatible with each woman’s actual choice. We use these restrictions to develop bounds on the frequency of intensive and extensive margin responses to reform.
We study efficient allocations and optimal policies in a Mirrleesean life-cycle economy with risky human capital accumulation and permanent ability differences. We assume that ability, labor supply, learning effort and returns to human capital are all private information of the agents. We show that the "no distortion at the top" result from the Mirrleesean literature may not apply if discouraging labor supply increases incentives to invest in human capital.
We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt-Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income.
We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital.