IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Heterogeneous Labor Skills, The Median Voter and Labor Taxes

  • Anderson L. Schneider

    (University of Minnesota and Federal Reserve Bank of Minneapolis)

  • Facundo Piguillem

    (University of Minnesota and Federal Reserve Bank of Minneapolis.)

We consider an infinite horizon economy in which agents are potentially heterogeneous with respect to both initial wealth and labor skills. We study indirect preferences over redistributive fiscal policies - sequences of affine taxes on labor and capital income - that can be supported as competitive equilibria. The first result is the following. Assume balanced growth preferences. If there is no heterogeneity in labor skills, then independent of the distribution of initial endowments, the best fiscal policy for the agent with the median endowment is preferred to any other policy by at least half of the individuals in the economy. If we allow for heterogeneity in labor skills, and initial capital holdings are an affine function of skills, then again, the most preferred time path of policies is preferred by a majority. When we allow for heterogeneity in skills, 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. The above results are extended to an economy in which the distribution of skills evolves stochastically over time and the ranking among agents is preserved. We find that a temporary increase in inequality could imply either higher or lower labor taxes, depending on the sign and level of the correlation between inequality and aggregate labor. Finally, we solved and simulated a calibrated stochastic version of the economy with capital accumulation. The volatility of labor taxes is much higher than the one found in the literature on optimal taxation. Regarding capital taxation, the bang-bang result holds as in Bassetto and Benhabib (2006).

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 835.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:835
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," NBER Working Papers 15483, National Bureau of Economic Research, Inc.
  2. B. Douglas Bernheim & Sita Nataraj Slavov, 2007. "A Solution Concept for Majority Rule in Dynamic Settings," Discussion Papers 07-029, Stanford Institute for Economic Policy Research.
  3. Lee E. Ohanian & Andrea Raffo & Richard Rogerson, 2006. "Long-term changes in labor supply and taxes: evidence from OECD countries, 1956-2004," Research Working Paper RWP 06-16, Federal Reserve Bank of Kansas City.
  4. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  5. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc.
  6. Ruediger Bachmann, 2011. "Public Consumption Over the Business Cycle," 2011 Meeting Papers 701, Society for Economic Dynamics.
  7. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  8. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  9. Albert Marcet & Morten O. Ravn, 2001. "The HP-filter in cross-country comparisons," Economics Working Papers 588, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
  10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  11. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, 09.
  12. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  13. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  14. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, Taxes, and the Median Voter," 2006 Meeting Papers 78, Society for Economic Dynamics.
  15. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  16. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
  17. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621 - 660.
  18. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
  19. Marina Azzimonti & Eva de Francisco & Per Krusell, 2008. "Aggregation and Aggregation," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 381-394, 04-05.
  20. Jess Benhabib & Adam Przeworski, 2006. "The political economy of redistribution under democracy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(2), pages 271-290, October.
  21. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  22. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  23. V. V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  24. Niepelt, Dirk, 2002. "Tax Smoothing versus Tax Shifting," Seminar Papers 711, Stockholm University, Institute for International Economic Studies.
  25. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  26. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  27. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February.
  28. Zvi Eckstein & Éva Nagypál, 2004. "The evolution of U.S. earnings inequality: 1961?2002," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Dec, pages 10-29.
  29. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  30. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  31. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  32. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  33. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 925-967.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed008:835. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.