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Optimal taxation and the skill premium

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  • Konstantinos Angelopoulos
  • James Malley
  • Apostolis Philippopoulos

Abstract

The stylized facts suggest a negative relationship between tax progres- sivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demo- graphic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2012_01.

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Date of creation: Jan 2012
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Handle: RePEc:gla:glaewp:2012_01

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Keywords: skill premium; optimal tax policy; government preferences;

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  1. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Mankiw, N. Gregory & Weinzierl, Matthew Charles & Yagan, Danny Ferris, 2009. "Optimal Taxation in Theory and Practice," Scholarly Articles 4263739, Harvard University Department of Economics.
  3. 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.
  4. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  5. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  6. Guido Cozzi & Giammario Impullitti, 2010. "Government Spending Composition, Technical Change, and Wage Inequality," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1325-1358, December.
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