A Road Map for Efficiently Taxing Heterogeneous Agents
Summary (1 min read)
Note:
- The Table reports the percentage change in aggregates due to the tax reform.
- The tax reform includes age and household assets as tax tags.
- Moreover, labor supply decreases as the tax distortion induces older households to retire earlier.
- If the tax function is a second-degree polynomial then the tax distortion also increases but a smaller rate for older households.
- Using the benchmark specification (third-degree polynomial), the authors can increase capital by a larger amount but also increase employment.
B Simpler Policies
- I restrict the age-dependent tax system to simpler forms.
- The aggregate effects and optimal tax properties are shown in Table 3 and Figure 1 , respectively.
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Frequently Asked Questions (4)
Q2. What is the tax function for a household with no earners?
If the tax function is a second-degree polynomial then the tax distortion also increases but a smaller rate for older households.
Q3. What is the effect of the benchmark model on labor supply elasticity?
1In the benchmark model the (heterogeneity in) labor supply elasticity depends mostly on the distribution of reservation wages and not on the value θ (see Hansen (1985), Rogerson (1988), and Chang and Kim (2006)).
Q4. What is the value function for a household with no earners?
The value function for a household employing the female worker is:V {NE,E} zj (a,x,κ,E−1) = maxc,a′,hf{ log(c) + ψmj (1− hm)1−θ1− θ + ψfj(1− hf )1−θ1− θ − ζ(Ef−1)+βsj+1 ∑ xm′ ∑ xf ′ Γxmx′mΓxfx′f ∗[ (1− λm) 1− p ∑s={2,3}psV 1z(j+1)(a ′,x′,κs,E) +λm 1− p ∑s={2,3}psV {NE,NE} z(j+1) (a ′,x′,κs,E)] (1)s.t. hf = 0 (2)(1+τc)c+a ′ = (1−τss)W −TL(W ; S)+(1+r(1−τk))(a+Tr) (3)E = {u, e} (4)The value function for a household with no earners is:V {NE,NE} zj (a,x,κ,E−1) = maxc,a′{ log(c) + ψmj (1− hm)1−θ1− θ + ψfj(1− hf )1−θ1− θ+βsj+1 ∑ xm′ ∑ xf ′ Γxmx′mΓxfx′f V 2 z(j+1)(a ′,x′,κ0,E)] (5)s.t. hm = 0, hf = 0 (6)(1+τc)c+a ′ = (1+r(1−τk))(a+Tr) (7)E = {u, u} (8)