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Heterogeneous Labor Skills, The Median Voter and Labor Taxes

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Anderson L. Schneider

    (University of Minnesota and FRB Minneapolis)

Abstract

We explore the relationship between changes in labor income inequality and movements in labor taxes over the last decades in the US. In order to do so, we model this relation through a political economy channel by developing a median voter result over sequences of capital and labor taxes. We study an in nite horizon economy in which agents are heterogeneous with respect to both initial wealth and labor skills. The rst result is the following: if initial capital holdings are an ane function of skills, then the median agent is decisive in any pairwise majority rule election. The second result provides the characterization of the most preferred tax sequence by the median agent: marginal taxes on labor depend directly on the absolute value of the distance between the median and the mean value of the skill distribution. Finally, numerical simulations show that temporary increases in inequality could imply either higher or lower labor taxes, depending on the sign of the correlation between inequality and TFP. This nding provides a simple an intuitive answer to why scal policy is procyclical in some countries. When calibrated for the US economy, the model does a good job on tting both the increasing trend and the levels of labor taxes in the last decades, and on matching short run co-movements.

Suggested Citation

  • Facundo Piguillem & Anderson L. Schneider, 2010. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," EIEF Working Papers Series 1002, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2009.
  • Handle: RePEc:eie:wpaper:1002
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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, pages 265-290.

    More about this item

    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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