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Working Paper
The Optimal Taxation of Business Owners
Business owners in the United States are disproportionately represented among the wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates that business income primarily reflects returns to the human capital of the owner. Motivated by these facts, this paper characterizes stationary efficient allocations and optimal linear taxes on income and wealth when business income depends on innate ability, luck, and the past effort of the owner. I first show that in stationary efficient allocations, more productive entrepreneurs typically bear more risk and the ...
Working Paper
Optimal time-consistent government debt maturity
The current literature on a government's optimal debt maturity structure contends that by purchasing short-term assets and selling long-term debt, it is possible to fully insulate the economy against fiscal shocks. The required short and long positions are large relative to GDP and constant. The market value of debt adjusts automatically and the constant debt positions and fluctuating bond prices insulate against potential shocks. However, achieving the goal of averting future shocks depends on the government perfectly committing to the future fiscal policy, for without this sustained ...
Working Paper
On the optimal design of transfers and income-tax progressivity
We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while ...
Working Paper
On the Optimality of Differential Asset Taxation
How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately observed shocks and have the ability to both divert capital to private ...
Report
How Should Tax Progressivity Respond to Rising Income Inequality?
We address this question in a heterogeneous-agent incomplete-markets model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to be log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in ...
Working Paper
Do Mortgage Subsidies Help or Hurt Borrowers?
Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price ...
Working Paper
Taxing Capital? The Importance of How Human Capital is Accumulated
This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this ...
Working Paper
Optimal Taxation with Endogenous Default under Incomplete Markets
How are the optimal tax and debt policies affected if the government has the option to default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default and labor taxes. On one hand, default prevents the government from incurring future tax distortions that would come along with the service of the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near-unit ...
Working Paper
Optimal Fiscal Policy in Overlapping Generations Models
In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.
Working Paper
The Optimal Taxation of Business Owners
Business owners in the United States are disproportionately represented among the very wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates business income primarily reflects returns to the human (rather than financial) capital of the owner. Motivated by these facts, this paper characterizes the optimal taxation of income and wealth in an environment where business income depends jointly on innate ability, luck, and the accumulated past effort exerted by the owner. I show that in (constrained) efficient allocations, more productive entrepreneurs ...