IDEAS home Printed from https://ideas.repec.org/p/pen/papers/14-015.html
   My bibliography  Save this paper

How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves?

Author

Listed:
  • Hans A. Holter

    (Uppsala University and UCFS)

  • Dirk Krueger

    (Department of Economics, University of Pennsylvania, CEPR and NBER)

  • Serhiy Stepanchuk

    (Cole Polytechnique Federale de Lausanne)

Abstract

The recent public debt crisis in most developed economies implies an urgent need for increasing tax revenues or cutting government spending. In this paper we study the importance of household heterogeneity and the progressivity of the labor income tax schedule for the ability of the government to generate tax revenues. We develop an overlapping generations model with uninsurable idiosyncratic risk, endogenous human capital accumulation as well as labor supply decisions along the intensive and extensive margins. We calibrate the model to macro, micro and tax data from the US as well as a number of European countries, and then for each country characterize the labor income tax Laffer curve under the current country-specific choice of the progressivity of the labor income tax code. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the laffer curve by 7%. We also find that modeling household heterogeneity is important for the shape of the Laffer curve.

Suggested Citation

  • Hans A. Holter & Dirk Krueger & Serhiy Stepanchuk, 2014. "How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves?," PIER Working Paper Archive 14-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:14-015
    as

    Download full text from publisher

    File URL: https://economics.sas.upenn.edu/sites/default/files/filevault/14-015.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alejandro Badel & Mark Huggett & Wenlan Luo, 2020. "Taxing Top Earners: a Human Capital Perspective," The Economic Journal, Royal Economic Society, vol. 130(629), pages 1200-1225.
    2. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2012. "The Laffer Curve in an Incomplete-Market Economy," TSE Working Papers 12-288, Toulouse School of Economics (TSE), revised Jul 2013.
    3. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492, National Bureau of Economic Research, Inc.
    4. Fatih Guvenen & Burhanettin Kuruscu & Serdar Ozkan, 2014. "Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 818-850.
    5. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 28(Jul), pages 2-13.
    6. Krueger, Dirk & Kindermann, Fabian, 2014. "High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk," CEPR Discussion Papers 10208, C.E.P.R. Discussion Papers.
    7. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    8. Chakraborty, Indraneel & Holter, Hans A. & Stepanchuk, Serhiy, 2015. "Marriage stability, taxation and aggregate labor supply in the U.S. vs. Europe," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 1-20.
    9. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    10. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2014. "Income Taxation of U.S. Households: Facts and Parametric Estimates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 559-581, October.
    11. Luis Cubeddu & José-Víctor Ríos-Rull, 2003. "Families As Shocks," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 671-682, 04/05.
    12. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 69-85.
    13. Roland Benabou, 2002. "Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?," Econometrica, Econometric Society, vol. 70(2), pages 481-517, March.
    14. Kindermann, Fabian & Krueger, Dirk, 2014. "High marginal tax rates on the top 1%?," CFS Working Paper Series 473, Center for Financial Studies (CFS).
    15. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    16. Hans A. Holter, 2015. "Accounting for cross‐country differences in intergenerational earnings persistence: The impact of taxation and public education expenditure," Quantitative Economics, Econometric Society, vol. 6(2), pages 385-428, July.
    17. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2014. "Income Taxation of U.S. Households: Facts and Parametric Estimates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 559-581, October.
    18. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    19. Kaiji Chen & Ayşe İmrohoroğlu, 2017. "Debt in the US economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 675-706, December.
    20. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    21. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
    22. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    23. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75(4), pages 352-352.
    24. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, 08.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2016. "Heterogeneity and Government revenues: Higher taxes at the top?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 69-85.
    2. Alejandro Badel & Mark Huggett & Wenlan Luo, 2020. "Taxing Top Earners: a Human Capital Perspective," The Economic Journal, Royal Economic Society, vol. 130(629), pages 1200-1225.
    3. Adam Blandin, 2021. "Human Capital And The Social Security Tax Cap," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1599-1626, November.
    4. Chakraborty, Indraneel & Holter, Hans A. & Stepanchuk, Serhiy, 2015. "Marriage stability, taxation and aggregate labor supply in the U.S. vs. Europe," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 1-20.
    5. Keane, Michael P., 2022. "Recent research on labor supply: Implications for tax and transfer policy," Labour Economics, Elsevier, vol. 77(C).
    6. Alexander Bick & Nicola Fuchs-Schündeln, 2018. "Taxation and Labour Supply of Married Couples across Countries: A Macroeconomic Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1543-1576.
    7. Carneiro, Fernando Moraes & Turnovsky, Stephen J. & Tourinho, Octavio Augusto Fontes, 2022. "Economic growth and inequality tradeoffs under progressive taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    8. Brinca, Pedro & Holter, Hans A. & Krusell, Per & Malafry, Laurence, 2016. "Fiscal multipliers in the 21st century," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 53-69.
    9. Blandin, Adam, 2018. "Learning by Doing and Ben-Porath: Life-cycle Predictions and Policy Implications," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 220-235.
    10. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2014. "Income Taxation of U.S. Households: Facts and Parametric Estimates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 559-581, October.
    11. Moore, Rachel & Pecoraro, Brandon, 2020. "Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework," Economic Modelling, Elsevier, vol. 87(C), pages 72-91.
    12. Sang Yoon (Tim) Lee, 2019. "Entrepreneurs, managers and inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 42-67, April.
    13. Minchul Yum, 2018. "On the distribution of wealth and employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 86-105, October.
    14. Kaymak, Barıș & Leung, David & Poschke, Markus, 2020. "Accounting for Wealth Concentration in the US," IZA Discussion Papers 13082, Institute of Labor Economics (IZA).
    15. Raei, Sepideh, 2020. "Gradual tax reforms: If you like it, you can keep it," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    16. Andrés Erosa & Luisa Fuster & Gueorgui Kambourov, 2016. "Towards a Micro-Founded Theory of Aggregate Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(3), pages 1001-1039.
    17. Nezih Guner & Martin Lopez-Daneri & Gustavo Ventura, 2023. "The Looming Fiscal Reckoning: Tax Distortions, Top Earners, and Revenues," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 50, pages 146-170, October.
    18. Daniele Coen‐Pirani, 2021. "Geographic Mobility And Redistribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 921-952, August.
    19. Macnamara, Patrick & Pidkuyko, Myroslav & Rossi, Raffaele, 2024. "Marginal tax rates and income in the long run: Evidence from a structural estimation," Journal of Monetary Economics, Elsevier, vol. 142(C).
    20. Castelluccio, Marco, 2021. "Flat tax? Maybe not a bad idea after all," Research in Economics, Elsevier, vol. 75(1), pages 60-78.

    More about this item

    Keywords

    Progressive Taxation; Fiscal Policy; Laffer Curve; Government Debt;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pen:papers:14-015. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Administrator (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.