Research
Heterogeneous Labor Skills, The Median Voter and
Labor Taxes ( joint with
Facundo Piguillem)
Abstract:
In this paper we explore the relationship between changes in labor income inequality
and movements in labor taxes over the last decades in US.
In order to do so, we model this link through a political economy channel by developing
a median voter result over sequence of taxes. We consider an infinite horizon economy in which agents are heterogeneous
with respect to both initial wealth and labor skills. We study indirect preferences over redistributive fiscal policies
- sequences of affine taxes on labor and capital income - that can be supported as a competitive equilibrium.
The paper assumes balanced growth preferences and full commitment.
The first result is the following: if initial capital holdings are an affine function of skills,
then the best fiscal policy for the agent with the median labor skill is preferred to any other policy by at
least half of the individuals in the economy. The second result provides the characterization
of the most preferred tax sequence by the median agent: marginal taxes on labor depend directly
on the absolute value of the distance between the median and the mean value of the skill distribution.
In order to analyze the co-movement properties of labor taxes, we extend the above results to an economy in which
the distribution of skills evolves stochastically over time. We find that a temporary increase in
inequality could imply either higher or lower labor taxes, depending on the sign and level of
the correlation between inequality and aggregate labor. We also numerically calculate a calibrated
version of the model and we compare the results with the data. The model does a good job on fitting the
increasing trend of labor taxes in the last decades and also on matching some short run co-movements.
Regarding capital taxation, the bang-bang result holds as in Bassetto and Benhabib (2006). We
also generalize the median voter theorem when there is no commitment
by adopting the same equilibrium definition as in Bernheim and
Slavov (2008).
Heterogeneous Belief and Optimal Taxation (joint
with Facundo Piguillem)
Abstract:
Although time consistency problems play an important role in
public policy, game theoretical models in macroeconomics seem to
indicate the opposite. Due to the complexity of these kind of
models, it is commonly assumed that the information is complete
and perfect. In turn, this assumption becomes the key element that
allows agents to coordinate perfectly to punish the government if
it deviates. As a result, a wide range of feasible payoffs can be
sustained as equilibrium, including the best payoff under
commitment. Since this approach is widely used for normative
purposes a natural question emerges: are the above results robust
to small variations in information? This paper analyzes an
investment taxation problem in an economy with incomplete
information. Specifically, we study an environment with the
following main characteristics: 1) the aggregate productivity
(fundamental) is stochastic, 2) only the government observes it
and; 3) every agent privately receives a noisy signal about the
fundamental. The first characteristic implies that the best policy
(tax on investment) with commitment is state contingent. The
second and third characteristics make the information incomplete.
In particular, agents have different information sets, and
therefore different beliefs, about the true state of the economy.
As a result, independently of the accuracy of the signal,
incomplete information reduces the set of equilibrium payoffs.
First, we show that any policy that depends solely on the
fundamental cannot be an equilibrium. Second, the best equilibrium
policy is independent of the fundamental. Finally, for any
discount factor strictly smaller than one and for any size of the
noise, the best equilibrium is inefficient.
Sequential Voting and Time-Consistent Redistribution (joint
with Facundo Piguillem)
Abstract:
This paper analyzes the role of reputation in influencing political
outcomes about fiscal policy. We consider a class of dynamic
economies populated by agents that are heterogeneous with respect to
initial wealth and vote sequentially over possible fiscal policies.
This fiscal policy is restricted to redistributive linear taxes on
accumulated wealth and labor income. In each period society decides
the current fiscal policy according to a variation of the majority
voting concept in Bernheim and Slavov (2008). The basic feature of
this equilibrium concept is that current choices of both taxes and
individual decisions imply different continuation policies. The
first result is the existence of a Dynamic Condorcet Winner which
coincides with the preferences of the median voter, the agent
holding the median wealth at time zero. When agents have balanced
growth preferences one can replace the majority voting criterion by
the following condition about the equilibrium candidate: after any
history of taxes, the median voter should prefer the outcome path
generated by the candidate equilibrium to any other possible path,
holding individual's decisions fixed. The second result is a
characterization of equilibrium outcomes when preferences are
logarithm, production function is Cobb-Douglas and there is full
depreciation of capital. The most preferred competitive equilibrium
for the median type with commitment can be sustained as an
equilibrium outcome for high enough discounting.
