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Heterogeneous Labor Skills, The Median Voter and Labor Taxes

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Anderson Schneider

    (Infinium Capital Management)

Abstract

This paper analyzes the median voter's most preferred sequences of labor taxes in the standard neoclassical growth model. We consider an infinite horizon economy in which agents are heterogeneous with respect to both initial wealth and labor skills. We start by providing a set of sufficient conditions for the existence of a Condorcet Winner. We then characterize the most preferred tax sequence by the median agent. First, we show that marginal labor taxes depend directly on the absolute value of the distance between the median and the mean value of the skills' distribution. Second, we find that in contrast to the intuition stemming from standard representative agent economies, labor taxes are more volatile and counter-cyclical taxation (e.g., increasing taxes in recession) might be optimal depending on the correlation between inequality and TFP. To assess the quantitative relevance of these findings, we calibrate the model economy to six countries and find that countercyclical labor taxation is optimal for all but the US. (Copyright: Elsevier)

Suggested Citation

  • Facundo Piguillem & Anderson Schneider, 2013. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 332-349, April.
  • Handle: RePEc:red:issued:11-142
    DOI: 10.1010/j.red.2013.02.001
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    References listed on IDEAS

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    Cited by:

    1. Alessandro Riboni & Facundo Piguillem, 2011. "Dynamic Bargaining over Redistribution in Legislatures," 2011 Meeting Papers 1320, Society for Economic Dynamics.
    2. Meltzer, Allan H. & Richard, Scott F., 2015. "A positive theory of economic growth and the distribution of income," Research in Economics, Elsevier, vol. 69(3), pages 265-290.

    More about this item

    Keywords

    Median voter; Business cycle; Labor taxes; Pro-cyclical fiscal policy; Tax shifting;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H0 - Public Economics - - General

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