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Factor Taxation with Heterogeneous Agents

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  • Domeij, David
  • Heathcote, Jonathan

Abstract

We investigate the welfare implications of changing the mix between capital and labor taxes for a model economy in which heterogeneous households face uninsurable labor income risk. The stochastic process for labor earnings we construct is consistent with empirical estimates of earnings risk, and also implies a distribution of asset holdings across households closely resembling that in the United States. We find that a vast majority of households prefers the status quo to eliminating capital taxes. This finding is interesting in light of the fact that this reform would be optimal if we abstracted from heterogeneity and assumed a representative agent. A second finding is that a utilitarian government prefers the current calibrated U.S. capital income tax rate (39.7 percent) to any change in the capital tax rate.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 01-07.

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Date of creation: 2001
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Handle: RePEc:duk:dukeec:01-07

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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  1. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
  2. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 2010. "Supply Side Interventions and Redistribution," Economic Journal, Royal Economic Society, vol. 120(543), pages 105-130, 03.
  3. Christophe Chamley, 1998. "Capital Income Taxation, Wealth Distribution and Borrowing Constraints," Working Papers 98-11, Centre de Recherche en Economie et Statistique.
  4. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
  5. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
  6. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, vol. 79(1), pages 55-69, January.
  7. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
  8. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  9. repec:fth:inseep:9811 is not listed on IDEAS
  10. Judd, Kenneth L, 1987. "The Welfare Cost of Factor Taxation in a Perfect-Foresight Model," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 675-709, August.
  11. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
  12. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  13. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  14. Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May.
  15. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  16. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers 649, Princeton University, Department of Economics, Industrial Relations Section..
  17. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  18. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  19. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  20. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
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Cited by:
  1. Martin Floden, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Econometric Society World Congress 2000 Contributed Papers 1013, Econometric Society.
  2. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 1995. "Supply side interventions and redistribution," Economics Working Papers 115, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc.
  4. David Domeij & Paul Klein, 2002. "Private Pensions: To What Extent Do They Account for Swedish Wealth Inequality?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 503-534, July.
  5. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers.
  6. Pierre-Daniel G. Sarte, 2006. "Stark optimal fiscal policies and sovereign lending," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 337-352.

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