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Altruism, Incomplete Markets, and Tax Reform

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  • Selo Imrohoroglu

    (USC)

  • Ayse Imrohoroglu

    (USC)

  • Luisa Fuster

    (University of Toronto)

Abstract

We calibrate the model to the U.S. data and numerically characterize transition paths from the current tax system to a reformed system. All our experiments are revenue-neutral. Starting from the current tax code, we allow for transitions to reformed steady-states in which the capital income taxation or labor income taxation is eliminated, with the lost revenues replaced by a higher labor income or consumption tax. In all cases, the reformed steady-state yields significantly higher capital and consumption. When the capital income tax is replaced by a higher labor income tax, only 38.4% are in favor. Using a consumption tax instead of the labor income tax raises support for reform to 45.7%. Eliminating the capital income tax in a phased-out fashion and using the more efficient consumption tax to replace the lost revenues brings support to 71.4%.

Suggested Citation

  • Selo Imrohoroglu & Ayse Imrohoroglu & Luisa Fuster, 2007. "Altruism, Incomplete Markets, and Tax Reform," 2007 Meeting Papers 491, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:491
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    3. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1), pages 1-36, March.
    4. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
    5. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
    6. Nawid Siassi, 2019. "Inequality and the Marriage Gap," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 160-181, January.
    7. Cagri S. Kumru & John Piggott, 2017. "Optimal Capital Income Taxation with Means-tested Benefits," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(3), pages 227-262, July.
    8. Nakajima, Makoto, 2020. "Capital income taxation with housing," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    9. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2007. "Intermediated quantities and returns," Working Papers 655, Federal Reserve Bank of Minneapolis.
    10. Heejeong Kim, . "Education, Wage Dynamics, and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    11. Emin Gahramanov & Xueli Tang, 2013. "Should We Refinance Unfunded Social Security?," Economica, London School of Economics and Political Science, vol. 80(319), pages 532-565, July.
    12. Kartik B. Athreya & Devin Reilly, 2009. "Consumption smoothing and the measured regressivity of consumption taxes," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 95(Win), pages 75-100.
    13. Barczyk, Daniel, 2016. "Ricardian equivalence revisited: Deficits, gifts and bequests," Journal of Economic Dynamics and Control, Elsevier, vol. 63(C), pages 1-24.
    14. William B. Peterman & Erick Sager, 2018. "Optimal Public Debt with Life Cycle Motives," Finance and Economics Discussion Series 2018-028, Board of Governors of the Federal Reserve System (U.S.).

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