Article
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

We analyze to which extent social inequality aversion differs across nations when controlling for actual country differences in labor supply responses. Towards this aim, we estimate labor supply elasticities at both extensive and intensive margins for 17 EU countries and the US. Using the same data, inequality aversion is measured as the degree of redistribution implicit in current tax-benefit systems, when these systems are deemed optimal. We find relatively small differences in labor supply elasticities across countries. However, this changes the cross-country ranking in inequality aversion compared to scenarios following the standard approach of using uniform elasticities. Differences in redistributive views are significant between three groups of nations. Labor supply responses are systematically larger at the extensive margin and often larger for the lowest earnings groups, exacerbating the implicit Rawlsian views for countries with traditional social assistance programs. Given the possibility that labor supply responsiveness was underestimated at the time these programs were implemented, we show that such wrong perceptions would lead to less pronounced and much more similar levels of inequality aversion.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... 5 While the above-mentioned papers focus on analyzing redistributive preferences at a specific point 3 We also calculate Pareto parameters in order to conduct an asymptotic analysis of top income taxation. From a methodological point of view, Bargain et al. (2014a) employ a discrete rather than continuous optimal income tax model and structurally estimate labor supply elasticities on the same dataset that they use to calculate social welfare weights. In contrast, we employ elasticities from the literature that have been obtained from various sources and different empirical approaches. ...
... At the extensive margin, the elasticities are 0.15 and 0.14, respectively. 4 Spadaro et al. (2015) is a study methodologically similar to Bargain et al. (2014a) in the sense that they use a discrete optimal income tax framework in the spirit of Saez (2002). In contrast to Bargain et al., but in similarity to our paper, they use exogenous elasticities from the literature. ...
... As evident from the figure, the implied elasticities range between 0.03 and 0.16, which belong to the lower end of the estimates reported in the literature. 32 32 The finding of a negative social welfare weight at the top is in contrast to Bargain et al. (2014a). This can potentially be explained by the fact that they estimate a low intensive margin elasticity for the top quintile, their exclusion of consumption taxation, resulting in lower top effective tax rates, or, because of differences between their top quintile and the asymptotic income level associated with our continuous optimal tax framework. ...
Article
Full-text available
We examine preferences for redistribution inherent in Swedish tax policy during 1971–2012 using the inverse optimal tax approach. The income distribution is carefully characterized with the help of administrative register data, and we employ behavioral elasticities reflecting the perceived distortionary effects of taxation. The revealed social welfare weights are high for non-workers, small for low-income earners, and hump-shaped around the median. At the top, they are always negative, especially so during the high-tax years of the 1970s and ’80s. The weights on non-workers increased sharply in the 1970s, fell drastically in the late ’80s and early ’90s, and have since then increased.
... In the empirical application, we define groups 1, .., I as quintiles of the gross income distribution. Bargain et al. (2014) show that changing the cut-off points does not affect the results substantially. ...
... Equivalently, the social planner values increasing the income for group 1 by one Euro 0.239 times as much as increasing the income of group 0 by one Euro. The low weights for the working poor are related to the high marginal tax rate for individuals moving from group 0 to group 1. 21 Relative weights of the upper four income groups are close to each other, in line with previous findings for Germany byBargain et al. (2014). ...
... In general, social weights for the working poor are much lower than those for the unemployed or the middle class. Bargain et al. (2014) calculate social weights for 17 European countries and the United States. For all analyzed countries, they find the highest social weights for the unemployed and substantially lower weights for the working poor, i.e., the group with the lowest net income apart from the unemployed. ...
Technical Report
Full-text available
A common assumption in the optimal taxation literature is that the social planner maximizes a welfarist social welfare function with weights decreasing with income. However, high transfer withdrawal rates in many countries imply very low weights for the working poor in practice. We reconcile this puzzle by generalizing the optimal taxation framework by Saez (2002) to allow for alternatives to welfarism. We calculate weights of a social planner's function as implied by the German tax and transfer system based on the concepts of welfarism, minimum absolute and relative sacrifice, as well as subjective justness. For the latter we use a novel question from the German SocioEconomic Panel. We find that the minimum absolute sacrifice principle is in line with social weights that decline with net income. Absolute subjective justness is roughly in line with decreasing social weights, which is reflected by preferences of men, West Germans, and supporters of the grand coalition parties.
... Bargain and Keane (2011) calculate social welfare weights for Ireland and the UK at different points in time, ranging from 1987 to 2005. Bargain et al. (2014) conduct a similar analysis for singles in 17 European countries. Lockwood and Weinzierl (2016) study the evolution of welfare weights in the US over the period 1979. ...
... Previous studies only analyzed social welfare weights in discrete-type models assuming away income effects (e.g., Bargain and Keane, 2011;Bourguignon and Spadaro, 2012;Bargain et al., 2013). ...
... We also generalize earlier literature on the inverse optimal-tax method in two ways (see e.g. Saez, 2002, Bourguignon and Spadaro, 2012, Bargain and Keane, 2011, and Bargain et al., 2013. ...
... Earlier literature with both intensive and extensive margins generally analyzed the discrete-choice model of Saez (2002) without income effects (e.g. Blundell et al., 2009;Bargain and Keane, 2010;Bourguignon and Spadaro, 2012;Bargain et al., 2014c). 7 Our simulations demonstrate that the political weights are primarily driven by the distribution of gross earnings and the tax-benefit schedules, and not by participation or income effects. ...
... For example, Bourguignon and Spadaro (2012, p.100) state that "[I]ndeed, tax-benefit schedules in the real world might result more from political economy forces than from the pursuit of some well-defined social objective." Bargain et al. (2014c) write in their conclusion: "[F]inally, it is natural to think that real world tax-benefit schedules result from complex historical and politial economy forces."And Lockwood and Weinzierl (2016, p.46) note: "[A]t first blush it appears that the best empirical case can be made for the possibility that policy is sub-optimal; that bias in the political system makes policy depart systematically from society's true preferences."By ...
Article
Full-text available
We measure the redistributive preferences of Dutch political parties using unique, detailed information from their election proposals. By employing the inverse optimal-tax method, we calculate the political weights across the income distribution for each political party. We find that all Dutch political parties give a higher political weight to middle incomes than to the poor. Moreover, the political weights of the rich are close to zero. Furthermore, we detect a strong political status quo bias as the political weights of all political parties hardly deviate from the weights implied by the pre-existing tax system. We argue that political-economy considerations are key in understanding these results.
... To do so, I show that to first order one must weight surplus at each income level $y by the marginal cost of providing $1 of welfare to individuals earning near $y, g(y). These weights g(y) are known in existing literature as the "inverse optimum" social welfare weights (see, e.g., Christiansen (1977); Christiansen and Jansen (1978); Blundell et al. (2009); Bargain et al. (2011); Bourguignon and Spadaro (2012); Lockwood and Weinzierl (2016); Zoutman et al. (2013); Bargain et al. (2014); Jacobs et al. (2017)). In other words, a social planner that has planning weights g(y) would find that the status quo tax schedule maximizes its objective function. ...
Article
Full-text available
This paper provides a method to measure the traditional Kaldor-Hicks notion of “economic efficiency” when taxes affect behavior. In contrast to traditional unweighted surplus, measuring efficiency requires weighting individual benefits (or surplus) by the marginal cost to the government of providing a $1 transfer at each income level. These weights correspond to the solution to the “inverse-optimum” program in the optimal tax literature: they are the social planning weights that would rationalize the status quo tax schedule as optimal. I estimate the weights using the universe of US income tax returns from 2012. The results suggest that measuring economic efficiency requires weighting surplus accruing to the poor roughly 1.5–2 times more than surplus accruing to the rich. This is because $1 of surplus to the poor can be turned into roughly $1.5–$2 of surplus to the rich by reducing the progressivity of the tax schedule. Following Kaldor and Hicks' original applications, I compare income distributions over time in the US and across countries. The results suggest US economic growth is 15–20% lower due to increased inequality than is suggested by changes in GDP. Because of its higher inequality, the U.S. is unable to replicate the income distribution of countries like Austria and the Netherlands, despite having higher national income per capita.
... Using the correspondence between ethical criteria and tax schedules, the so-called inverseoptimum literature reverse-engineers tax systems to reveal the implicit criteria that would make current income tax rates optimal (see e.g. (Bourguignon and Spadaro, 2012;Bargain et al., 2014;Hendren, 2014;Chang et al., 2017)). To reconcile this strand of the literature with extensive survey evidence which shows that current tax progressivity rarely reflects a majority's preference, one should concede that the revealed criterion of the social planner are misaligned with those of a majority. ...
Preprint
Full-text available
An original method to find the shape of favored redistributions is presented, which is in turn used to assess the political acceptability of the optimal tax theory. Two surveys have been conducted in 2016 to quantify French preferences for income redistribution. In the first survey, respondents picked their preferred values for parameters which were used to determine the shapes of redistributions. These parameters included the proportion of winners and losers from a tax reform, and the minimum guaranteed income. Using different algorithms, several redistributions were derived from the interpolation of the median choices of each parameter (50% of winners, 10% of losers and a monthly demogrant of 800€). They resulted in transfers from high to low incomes of one tenth of the national disposable income. In the second survey, a majority of respondents agreed on implementing these redistributions. These results are in line with previous literature and robust to alternative specifications. Interestingly, the average desired redistribution corresponds closely to the shape of the optimal taxation derived from an utilitarian criterion. This allowed to show that this redistribution fails to obtain a significant majority support (contrarily to others), despite its good reception in a setting inhibiting self-interest. Finally, this study provides evidence that French citizens support a more direct democratic procedure to define the income tax rates, and describes a way to do so.
... Spadaro et al. (2012) estimate and compare average MSWWs on five income-earning groups for 26 European countries, finding substantial variation across them. Olivier Bargain et al. ( , 2014a include the United States (as well as European countries) in their analyses. In , they study how tax policy has affected inequality in the United States from 1979 to 2007 and find partisan effects on policy consistent with the trends we show below. ...
Article
Calculating the welfare implications of changes to economic policy or shocks requires economists to decide on a normative criterion. One approach is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference, as in the recent surge of "inverse-optimum" research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse-optimum inference on U.S. tax policy from 1979 through 2010 and argue that the results either undermine the normative relevance of the approach or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations.
Book
Tax policies are informed by principles developed in the tax theory and policy literature. This Element surveys the policy lessons that emerge from optimal tax analysis since the 1970s. This Element begins with the evolution of tax policy principles from the comprehensive income approach to the expenditure tax approach to normative tax analysis based on social welfare maximization and recounts key results from the optimal income tax analysis inspired by Mirrlees and extended by Diamond to the extensive margin approach. This Element also emphasizes analytical techniques that yield empirically relevant concepts and show the equity-efficiency trade-off at the heart of tax policy. We also extend the analysis to recent literature incorporating involuntary unemployment, and policies like welfare and unemployment insurance.
Article
This paper studies optimal non-linear income taxation in a model with labor supply responses at the intensive (hours, effort) and extensive (participation) margins. It shows that an Earned Income Tax Credit (EITC) with negative marginal taxes and negative participation taxes at the bottom is optimal if, first, semi-elasticities of participation are decreasing along the income distribution and, second, social concerns for redistribution from the poor to the very poor are sufficiently weak. This result is driven by a previously neglected trade-off between distortions at the intensive margin and distortions at the extensive margin, i.e., between two aspects of efficiency. Numerical simulations suggest that a strong expansion of the EITC for childless singles in the US could be welfare-increasing.
Book
From the 1980s onwards income inequality has reversed course and increased in many advanced countries. Moreover, top income shares have increased, and top tax rates on upper-income earners have declined significantly in many Organisation for Economic Co-operation and Development (OECD) countries during this period. It is very difficult to account for the rise in income inequality using the standard labour supply/demand explanation. Hence, the role of redistributive taxation should not be dismissed in these discussions. Fiscal redistribution has become less effective in compensating for increasing inequalities since the 1990s. Some of the basic features of redistribution can be explained through the optimal tax framework developed by J. A. Mirrlees (1971). We survey some of the earlier results in linear and nonlinear taxation and produce some new numerical results both in the standard Mirrlees model and in its extensions. Given the key role of capital income in overall income inequality, we also consider the optimal taxation of capital income. We also examine empirically the relationship between the extent of redistribution and the components of the Mirrlees framework, including measures for inherent inequality and the government’s redistributive preferences. We analyse briefly the redistributive role of factors such as publicly provided private goods, public employment, endogenous wages in the overlapping generations (OLG) model and income uncertainty that are missing in the standard model.
Article
We derive a simple sufficient-statistics test for whether a nonlinear tax-transfer system is second-best Pareto efficient. If it is not, then it is beyond the top of the Laffer curve and there exists a tax cut that is self-financing. The test depends on the income distribution, extensive and intensive labor supply elasticities, and income effect parameters. A tax-transfer system is likely to be inefficient if marginal tax rates are quickly falling in income. We apply this test to the German tax-transfer system, and we find that the structure of effective marginal tax rates is likely to be inefficient in the region where transfers are phased out.
Article
Full-text available
Drawing from the formal setting of the optimal tax theory, the paper identifies the level of Rawlsianism (or aversion to poverty) of the European social planners starting from the observation of real data and redistribution systems and builds a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. The shape of the social welfare function implicit in tax-benefit systems is recovered by inverting the optimal taxation model on actual effective tax rates, assuming that existing systems are optimal for some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a European survey on incomes and living conditions of households (EU-SILC 2007). Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high decommodification willingness and high Rawlsianism in the Scandinavian, social-democratically influenced welfare states. There is an equally clear coincidence of low decommodification willingness and utilitarianism in the Southern European welfare states. The Continental European countries group closely together in the middle of the scale (except Germany that scores among the highest), as corporatist and etatist. Anglo-Saxon liberal welfare states score close to Continental European countries. Finally the group of Eastern European countries seems to split in two subgroups, one similar to the Continental European countries and one, mostly composed by Baltic countries, with scarce willingness to decommodify citizens, similar to the Southern European model.
Article
Full-text available
Political constraints and incentives are the true driver of tax reforms. This paper reviews the political economics literature on personal income tax systems and reforms to see how political mechanisms help explain tax reforms. We take some of the implications of these theories to the data using LABREF, a database that identifies labor tax reforms in the European Union for the period 2000–2007, and control for economic and labor market factors. We find that political variables carry more weight than economic variables, and we show empirical regularities that support political economy theories. We also find that governments tended to reform more in better economic times, engaging in pro-cyclical behavior.
Article
Full-text available
The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. This paper surveys recent work that uses structural models and micro data to evaluate the size of this response. Whereas the earlier literature on this issue often concluded that aggregate labor supply elasticities were small, recent work has identified three key reasons that the aggregate elasticity may be quite large. First, earlier estimates abstracted from several key features, including human capital accumulation, leading to estimates that are dramatically negatively biased. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of previous estimates for aggregate labor supply. Third, structural estimation of responses along the extensive (i.e., employment) margin are typically quite large.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Book
Full-text available
What is a fair distribution of resources and other goods when individuals are partly responsible for their achievements? This book develops a theory of fairness incorporating a concern for personal responsibility, opportunities and freedom. With a critical perspective, it makes accessible the recent developments in economics and philosophy that define social justice in terms of equal opportunities. It also proposes new perspectives and original ideas. The book separates mathematical sections from the rest of the text, so that the main concepts and ideas are easily accessible to non-technical readers. It is often thought that responsibility is a complex notion, but this monograph proposes a simple analytical framework that makes it possible to disentangle the different concepts of fairness that deal with neutralizing inequalities for which the individuals are not held responsible, rewarding their effort, respecting their choices, or staying neutral with respect to their responsibility sphere. It dwells on paradoxes and impossibilities only as a way to highlight important ethical options and always proposes solutions and reasonable compromises among the conflicting values surrounding equality and responsibility. The theory is able to incorporate disincentive problems and is illustrated in the examination of applied policy issues such as: income redistribution when individuals may be held responsible for their choices of labor supply or education; social and private insurance when individuals may be held responsible for their risky lifestyle; second chance policies; the measurement of inequality of opportunities and social mobility.
Article
Full-text available
In his Presidential Address to the European Economic Association, Tony Atkinson introduced the idea of a “charitable conservatism” position in public policy, which “exhibits a degree of concern for the poor, but this is the limit of the redistributional concern and there is indifference with respect to transfers above the poverty line.” This contrasts with the perspective of poverty indices, which give zero weight to those above the poverty line, which we call “poverty radicalism,” and with standard “inequality aversion” where the weights decline smoothly as we move up the income scale. The object of this paper is, first, to clarify the interrelationships between charitable conservatism, poverty radicalism and inequality aversion. We do this by showing how the patterns of welfare weights to which each of these gives rise are related to each other. Secondly, we are concerned to demonstrate the implications of these different views for optimal income taxation. In terms of levels and patterns of marginal tax rates, we show that charitable conservatism and poverty radicalism are on a continuum, and by choice of low or high inequality aversion one can approximate either outcome fairly well.
Article
Full-text available
There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior.
Article
Full-text available
This study analyzes the effects of right-wing extremism on the well-being of immigrants based on data from the German Socio-Economic Panel (SOEP) for the years 1984 to 2006 merged with state-level information on election outcomes. The results show that the life satisfaction of immigrants is significantly reduced if right-wing extremism in the native population increases. Moreover ; the life satisfaction of highly educated immigrants is affected more strongly than that of low-skilled immigrants. This supports the view that policies aimed at making immigration more attractive to the high-skilled have to include measures that reduce xenophobic attitudes in the native population. --
Article
Full-text available
Drawing from the formal setting of the optimal tax theory (Mirrlees 1971), the paper identifies the level of Rawlsianism of some European social planner starting from the observation of the real data and redistribution systems and uses it to build a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. It must be considered as a contribution to the comparative research on the structure and typology of the Welfare State (Esping-Andersen, 1990). In particular we consider the optimal taxation model that combines both intensive (Mirrlees) and extensive (Diamond) margins of labor supply, as suggested by Saez (2002) in order to assess the degree of decommodification of seven European welfare systems. We recover the shape of the social welfare function implicit in taxbenefit systems by inverting the model on actual effective tax rates, as if existing systems were optimal according to some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a pan-European tax-benefit microsimulation model. Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high decommodification and high Rawlsianism in the Scandinavian, social-democratically influenced welfare states (Denmark). There is an equally clear coincidence of low decommodification and utilitarianism in the Anglo–Saxon liberal model (UK) and in the Southern European welfare states (Italy and Spain). Finally, the Continental European countries (Finland, Germany and France) group closely together in the middle of the scale, as corporatist and etatist.
Article
Full-text available
There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Article
Full-text available
This paper inverts the usual logic of applied optimal income taxation. It starts from the observed distribution of income before and after redistribution and corresponding marginal tax rates. Under a set of simplifying assumptions, it is then possible to recover the social welfare function that would make the observed marginal tax rate schedule optimal. In this framework, the issue of the optimality of an existing tax-benefit system is transformed into the issue of the shape of the social welfare function associated with that system and whether it satisfies elementary properties. This method is applied to the French redistribution system with the interesting implication that the French redistribution authority may appear, under some plausible scenario concerning the size of the labor supply behavioral reactions, non Paretian (e.g. giving negative marginal social weights to the richest class of tax payers).
Article
Full-text available
The aim of the project was to build EUROMOD, a tax-benefit microsimulation model covering all 15 Member States of the European Union. This has been achieved, and baseline results are available for 14 countries. (Validated results for Sweden will appear shortly.) EUROMOD has been used for a number of policy-related exercises ranging from studies of the relationship of public spending on social benefits to poverty and the implications of a common European minimum pension, to the impact of welfare benefits on work incentives and the consequences of non-indexation of taxes and contributions. In addition, the model is ready to be used for a wide range of new applications. Not only can it be used to explore the impact of prospective (and hypothetical) changes in social and fiscal policy on poverty and inequality; it can also estimate the cost of reforms, provide options for financing mechanisms, and establish the effect of the reforms in other dimensions such as the work incentives of household members and any implied redistribution within the household. In many ways, EUROMOD is ahead it its time. When the project first started in 1998 (and when the idea was first conceived in 1996) the priorities set at the Lisbon European Council could not have been fully anticipated. It is now clear that the project was timely. EUROMOD is ready to play a role in analysing changes in social and fiscal policies proposed by Member States with reference to agreed benchmarks for the reduction of poverty and social exclusion. The project final report describes in some detail the process of model construction. It was a very complex project that was more demanding for all concerned than could have been anticipated. In some respects it was more akin to an engineering enterprise than a social science research project. In building EUROMOD, particular emphasis has been placed on: transparency of methods: it is therefore open to critiques of the approach as a whole, as well as criticism and suggestion on matters of detail; ??designing a model that is flexible and adaptable: to make the range of uses as wide as possible and to maximise the length of its useful life; ??consistency and comparability across countries: developing harmonisation of methods, assumptions and input and output concepts is a major part of building an integrated European model. Concretely, it involved: ??identifying common structural characteristics in national policies; ??identifying common data requirements; ??parameterising and generalising as many aspects of the model as possible, including the definitions of the income base and unit of assessment or entitlement for each tax and benefit, the effective equivalence scales inherent in social benefit payments, and the output income measure. This approach not only allows each system to be modelled in a manner that is comparable to existing national practice, it also provides the model user with a much greater range of choice and greater flexibility than ñ we believe ñ is available in any other existing tax benefit model. Before the project began, the degree of experience and expertise with tax-benefit modelling in Member States varied greatly. As is well known, the tax and transfer systems also vary widely in underlying philosophy, as well as in current structure and size. The national sources of microdata with which to build the model were not equally suited to the task. One of the projectís most significant achievements is its success in bringing tax-benefit modelling capacity in all Member States up to the level of best practice in the EU.
Article
Full-text available
International comparisons of minimum-wage levels have largely focused on the gross value of minimum wages, ignoring the effects of taxation on both labour costs and the net income of employees. This paper presents estimates of the tax burdens facing minimum-wage workers. These are used as a basis for cross-country comparisons of the net earnings of these workers as well as the cost of employing them. In addition, results show the evolution of net incomes and labour costs during the 2000-2005 period and the relative importance of minimum-wage adjustments and tax reforms in driving these changes. Statutory minimum wages are in place in 21 OECD countries, ranging between USD 0.7 and USD 10 per hour. In a number of countries, minimum-wage levels have gone up in real terms in recent years. Given considerable tax burdens even at the lowest wage levels, tax policy measures can have a sizable impact on the net earnings available to low-wage workers. Social contributions and payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers. The international variation of minimum labour costs in dollar terms is enormous, with hourly costs in the highest-cost country (the Netherlands) exceeding those at the bottom (Mexico) by a factor of 12. Differences are also large when compared across countries that are closer geographically or whose economies are more integrated. Despite reductions in non-wage labour costs in several countries, there has been no convergence of minimum labour costs in recent years. This paper is the working paper version of a chapter to appear in the 2007 edition of Taxing Wages, an annual OECD publication. The Taxing Wages chapter will include results for 2006.
Book
Peter Coughlin provides the most comprehensive and integrated analysis of probabilistic voting models to date. Probabilistic voting theory is the mathematical prediction of candidate behaviour in, or in anticipation of, elections in which candidates are unsure of voters' preferences. The theory asks first whether optimal candidate strategies can be determined given uncertainty about voter preferences, and if so, what exactly those strategies are given various circumstances. It allows the theorist to predict what public policies will be supported and what laws passed by elected officials when in office and what positions will be taken by them when running in elections. One of the leading contributors to this rapidly developing literature, at the leading edge of public choice theory, Coughlin both reviews the existing literature and presents results that unify and extend developments in the theory.
Article
Just as the Gini inequality index captures people's relative deprivation (Yitzhaki, 1979), so, we show in this paper, Gini-based progressivity and horizontal inequity indices capture individual perceptions of relative fiscal harshness and ill-fortune. In fact, we find that these links between individualistic perceptions and the measurement of the distribution and redistribution of income generalise to the family of indices based on the extended Ginis of Donaldson and Weymark (1980) and Yitzhaki (1983). Through "leaky bucket'' experiments, we also suggest how we can parameterise the inequality aversion present in these indices. Analysis of the Canadian gross and net income distributions (conducted using recently developed statistical inference procedures) shows the distribution and the aggregation of these individual indicators of relative deprivation, fiscal harshness and ill-fortune in 1981 and in 1990.
Article
Drawing from the formal setting of the optimal tax theory (Mirrlees 1971), the paper identifies the level of Rawlsianism of some European social planners starting from the observation of real data and redistribution systems and uses it to build a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. It must be considered as a contribution to the comparative research on the structure and typology of the Welfare State. In particular we consider the optimal taxation model that combines both intensive and extensive margins of labor supply, as suggested by Saez (2002) in order to assess the degree of decommodification of seven European welfare systems. We recover the shape of the social welfare function implicit in tax-benefit systems by inverting the model on actual effective tax rates, as if existing systems were optimal according to some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a pan-European tax-benefit microsimulation model. Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high decommodification willingness and high Rawlsianism in the Scandinavian, social-democratically influenced welfare states (Denmark). There is an equally clear coincidence of low decommodification willingness and utilitarianism in the Anglo-Saxon liberal model (UK) and in the Southern European welfare states (Italy and Spain). Finally, the Continental European countries (Finland, Germany and France) group closely together in the middle of the scale, as corporatist and etatist.
Article
This paper examines the distributional and behavioral effects of the Earned Income Tax Credit (EITC). We chart the growth of the program over time, and argue that several expansions show that real responses to taxes are important. We use tax data to show the distribution of benefits by income and family size, and examine the impacts of hypothetical reforms to the credit. Finally, we calculate the efficiency effects of marginal changes to EITC parameters.
Article
This paper proposes to evaluate tax reforms by aggregating money metric losses and gains of different individuals using "generalized social marginal welfare weights." Optimum tax formulas take the same form as standard welfarist tax formulas by simply substituting standard marginal social welfare weights with those generalized weights. Weights directly capture society's concerns for fairness without being necessarily tied to individual utilities. Suitable weights can help reconcile discrepancies between the welfarist approach and actual tax practice, as well as unify in an operational way the most prominent alternatives to utilitarianism such as Libertarianism, equality of opportunity, or poverty alleviation.
Article
This paper reviews recent developments in the theory of optimal labor income taxation. We emphasize connections between theory and empirical work that were initially lacking from optimal income tax theory. First, we provide historical and international background on labor income taxation and means-tested transfers. Second, we present the simple model of optimal linear taxation. Third, we consider optimal nonlinear income taxation with particular emphasis on the optimal top tax rate and the optimal profile of means-tested transfers. Fourth, we consider various extensions of the standard model including tax avoidance and income shifting, international migration, models with rent-seeking, relative income concerns, the treatment of couples and children, and non-cash transfers. Finally, we discuss limitations of the standard utilitarian approach and briefly review alternatives. In all cases, we use the simplest possible models and show how optimal tax formulas can be derived and expressed in terms of sufficient statistics that include social marginal welfare weights capturing society's value for redistribution, behavioral elasticities capturing the efficiency costs of taxation, as well as parameters of the earnings distribution. We also emphasize connections between actual practice and the predictions from theory, and in particular the limitations of both theory and empirical work in settling the political debate on optimal labor income taxation and transfers.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Article
The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. Conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small. In this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions. In particular, we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin. We conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities. (JEL D91, E24, J22)
Article
Abstract We study,the structure of nonlinear,taxes in a dynamic,economy,subject to political economy problems. In contrast to existing literature, taxes are set by a self-interested politician, without any commitment power, who is partly controlled by the citizens. We prove that: (1) a version of the revelation principle applies; and (2) the provision of incentives to politicians can be separated,from the provision of incentives to individuals. Using these results, we provide conditions under which distortions created by political economy,problems,persist or disappear. We then extend these results to environments,with partially benevolent,governments,and potential ex post con‡ict among,the citizens. Keywords: dynamic incentive problems, mechanism design, optimal taxation, political economy, revelation principle. JEL Classi…cation: H11, H21, E61, P16. 1. We thank two anonymous referees, the editor, Kjetil Storesletten, and audiences at many seminars for
Article
Though the traditional literature in fiscal federalism argues that the Federal government should have primary responsibility for income redistribution, U.S. states are in fact actively engaged in redistribution. This paper develops a positive model of the respective roles of state and Federal governments that can rationalize this observation. Redistribution by states creates positive horizontal fiscal externalities to other states due to migration, but negative vertical fiscal externalities to the national government due to changes in reported taxable income. We forecast that states will engage in at least some redistribution, though to a lesser degree the greater are mobility relative to taxable income elasticities. The Federal government can then choose the degree of Federal redistribution to assure that the net externalities are zero. Given such policies, we then estimate the welfare weights and migration elasticities for different income groups that would generate the effective net tax schedules observed in the U.S. The parameter estimates are broadly plausible, suggesting that the model can help explain the division of responsibilities for redistribution between state and Federal governments.
Article
We suggest the first large-scale international comparison of labor supply elasticities for 17 European countries and the US, separately by gender and marital status. Measurement differences are netted out by using a harmonized empirical approach and comparable data sources. We find that own-wage elasticities are relatively small and much more uniform across countries than previously thought. Differences exist nonetheless and are found not to arise from different tax-benefit systems or demographic compositions across countries. Thus, we cannot reject that countries have genuinely different preferences. Three other results, important for welfare analysis, are consistent over all countries: the extensive (participation) margin dominates the intensive (hours) margin; for singles, this leads to larger labor supply responses in low-income groups; income elasticities are extremely small everywhere. Finally, the results for cross-wage elasticities in couples are opposed between regions, consistent with complementarity in spouses’ leisure in the US versus substitution in spouses’ household production in Europe.
Article
In this paper we apply the theory of tax reform to derive empirical results about the structure of indirect taxes in Belgium. We focus on the equity-efficiency trade-off and try to formulate conclusions which are relevant for policy makers. To integrate the merit good component in the indirect taxes on tobacco and transportation, we compute the implicit valuation attached to them by policy makers. This component is considerable and affects the whole structure of tax rates.
Article
When all jobs are full time and workers cannot substitute alternative jobs, the skills of workers are observable. Nevertheless, the optimum may involve a benefit for those who choose not to work (making their skills unobservable). When the tax structure and benefit for nonworkers are chosen to maximize welfare, they tradeoff the social marginal utility of consumption against the needed incentive to work. In contrast to more conventional models, the optimal tax schedule may have discontinuities and may involve subsidization of the work of low earners.
Article
This paper constructs quantified measures of preferences for redistribution using survey data from seven OECD countries in which respondents were asked how much in taxes individuals earning given levels of income "should" pay. The resulting preferred tax rates generate reasonable budget sets, are consistent with observed tax rates, and correlate closely with conventional categorical preference measures and voting behavior. While the overall variation in preferred progressivity is substantial, differences in preferences across political and economic subgroups are modest. Individuals do not appear to prefer disproportionately lower tax rates at income levels close to their own. Actual tax schedules imply a larger size of government than preferred tax schedules but often do tend to reflect preferred progressivity.
Article
With increasing globalisation of knowledge, there are increased opportunities to ‘learn’ from the experience of policy interventions elsewhere. This paper presents evidence on the extent of international convergence in public policy, with particular focus on labour, welfare, savings and retirement policy. Questions addressed in this framework include: to what extent is policy diffusion or convergence a real and relevant phenomenon? What role have economists played in the transfer of policy across national domains? Has policy transfer led to ‘better’ public policy? Are there any practical limitations to policy convergence?
Book
Peter Coughlin provides the most comprehensive and integrated analysis of probabilistic voting models to date. Probabilistic voting theory is the mathematical prediction of candidate behaviour in, or in anticipation of, elections in which candidates are unsure of voters’ preferences. The theory asks first whether optimal candidate strategies can be determined given uncertainty about voter preferences, and if so, what exactly those strategies are given various circumstances. It allows the theorist to predict what public policies will be supported and what laws passed by elected officials when in office and what positions will be taken by them when running in elections. One of the leading contributors to this rapidly developing literature, at the leading edge of public choice theory, Coughlin both reviews the existing literature and presents results that unify and extend developments in the theory.
Article
We study the structure of non-linear taxes in a dynamic economy subject to political economy problems. In contrast to existing literature, taxes are set by a self-interested politician, without any commitment power, who is partly controlled by the citizens. We prove that: (1) a version of the revelation principle applies; and (2) the provision of incentives to politicians can be separated from the provision of incentives to individuals. Using these results, we provide conditions under which distortions created by political economy problems persist or disappear. We then extend these results to environments with partially benevolent governments and potential ex post conflict among the citizens.
Article
The abstract for this document is available on CSA Illumina.To view the Abstract, click the Abstract button above the document title.
Article
Preferences for redistribution may be influenced by values and beliefs about distributive justice as well as by self-interest. People may prefer more redistribution to the poor if they believe that poverty is caused by circumstances beyond individual control. Therefore, beliefs about the causes of income may affect demand for redistribution. Alternatively, the effect of these beliefs on redistributive preferences may be spurious if they are correlated with income, and self-interest is not properly controlled for. They may also measure incentive cost concerns. Using social survey data, I find that self-interest cannot explain the effect of these beliefs on redistributive preferences.
Article
From book description: Modern labor economics has continued to grow and develop since the first volumes of this Handbook were published. The subject matter of labor economics continues to have at its core an attempt to systematically find empirical analyses that are consistent with a systematic and parsimonious theoretical understanding of the diverse phenomenon that make up the labor market. As before, many of these analyses are provocative and controversial because they are so directly relevant to both public policy and private decision making. In many ways the modern development in the field of labor economics continues to set the standards for the best work in applied economics. This volume of the Handbook has a notable representation of authors - and topics of importance - from throughout the world.
Article
Given a set of value judgements, an initial state, and a model of the economy, one can ask whether some feasible tax change would increase welfare. We do this by defining the marginal cost in terms of welfare of raising an extra rupee from the ith good. The inverse optimum problem is the calculation of non-negative welfare weights on households which imply that the initial state is optimum. If no such welfare weights exist, then a Pareto improvement is possible. We illustrate the concepts and results using data from the Indian economy for 1979–1980. Directions of tax reform for a number of specific social welfare functions and for Pareto improvements are presented.
Article
This paper analyzes inequality aversion across countries and identifies factors which explain the empirical heterogeneity observed across these countries. We do this by hypothesizing a ‘natural rate’ of subjective inequality across countries and solving for the explicit country-specific value of the inequality aversion parameter that is consistent with the hypothesized natural rate. We present evidence consistent with the existence of a natural rate of subjective inequality by verifying that countries with low (high) tolerance for inequality have low (high) inequality as measured by the Gini coefficient as well. Finally, we explore the socio-economic factors that are consistent with observed differences in inequality aversion across these countries, finding important effects of female empowerment, public education expenditures, per capita income, economic growth, and population size.
Article
What drives people’s support of governmental reduction of income inequality? We employ data from a large international survey in order to evaluate the explanatory power of three competing forces, referred to as the ‘homo oeconomicus effect’, the ‘public values effect’, and the ‘social rivalry effect’. The empirical analysis reveals that at the aggregate level all three effects play a significant role in shaping individual preferences for political redistribution. Attitudes of citizens in formerly socialist countries turn out to differ from those of western citizens in a systematic way.
Article
The revelation of implicit social preferences is a fresh field of econometrics. In this paper the theoretical setting is a model of optimal indirect taxation. A parametric preference function is specified, which makes it possible to separate and quantify three different effects. First, it provides a condensed quantitative measure of the degree of income inequality aversion. Second, a set of parameters evaluate external social costs induced by the consumption of certain commodities. Finally, the function allows estimation of implicit equivalent income scales. The authors consider the results as a source of information about an important part of Norwegian tax policy.
Article
A static neoclassical structural model is presented, explaining labor supply of both spouses in two adults households. Family preferences are described with a direct translog utility function, with the husband's leisure, the wife's leisure, and family income as its arguments. We assume that the choice set of each family is finite. Account is taken of the Dutch tax and benefits system. We allow for hours restrictions and random preferences, and account for unobserved wages of nonworkers. The models are estimated using smooth simulated maximum likelihood. Results based upon Dutch cross-section data from 1987 are illustrated by confidence intervals for elasticities, and by several policy simulations.
Article
This paper seeks to explain within- and between-country variation in redistributive preferences in terms of self-interest concerns and an input-based concept of fairness, which we examine by looking at the effects of beliefs regarding the causes of income differences. Results of estimations based on data for 25 countries indicate that both factors are indeed important determinants of redistribution support, in line with hypothesised patterns. We find that while differences in beliefs on what causes income differences seem to be important for explaining within-country variation in redistributive preferences, they do little to explain between-country differences. Differences in the effects of holding certain beliefs, however, are important for explaining between-country variation in redistributive preferences, suggesting considerable heterogeneity across societies in what is considered as fair.
Article
This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin (intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided.
Article
This paper examines the impact of the Tax Reform Act of 1986 (TRA86), which included an expansion of the earned income tax credit, on the labor force participation and hours of work of single women with children. We identify the impact of TRA86 by comparing the change in labor supply of single women with children to the change for single women without children. We find that between 1984–1986 and 1988–1990, single women with children increased their relative labor force participation by up to 2.8 percentage points. We observe no change in the relative hours worked by single women with children who were already in the labor force.
Article
Just like economists, voters have conflicting views about redistributive taxation because they estimate its incentive costs differently. We model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs. In the long run 'left-wing dynasties' believing less in individual effort and voting for more redistribution coexist with 'right-wing dynasties.' This allows us to explain why individual mobility experience and not only current income matters for political attitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
This article describes a procedure that can be used to infer interesting information about the preferences of regulators from the pricing decisions they make. This is done by using an adaptation of the familiar Ramsey pricing model, which allows benefits derived from the consumption of different goods or derived by different consumers to carry different "social" weights. These weights are then exposed by inverting the first-order conditions of the constrained-maximum problem.
How great an effect does the structure of income taxes have on female labour supply? This issue is investigated using a discrete-choice static labour supply model for married couples in Ireland. The model incorporates fixed costs of working and simultaneously explains participation decisions and preferred hours of work. The model is estimated using data from the 1994 wave of the Living in Ireland Survey. Simulations examine the labour supply effects of introducing greater independence in the tax treatment of married couples, compared with an income-splitting system, and alternative forms of tax cuts. Copyright 2009 The Authors. Journal compilation CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd. 2009.
Article
Optimal tax rules are used to evaluate the optimality of taxation for lone mothers in Germany and Britain. The theoretical model is combined with elasticities derived from the structural estimation of lone mothers' labour supply. For both countries we do not find that in-work credits with marginal tax rates are optimal. However we show that when the government has a low taste for redistribution, out-of-work transfers and transfer for the working poor are very similar, implying very low marginal tax rates. Further, the current tax and transfer systems in both countries are shown to be optimal only if governments have a much higher welfare value for income received by the non-workers than the working poor. Copyright © Institute of Fiscal Studies. Journal compilation © Royal Economic Society 2009.
Article
This paper examines the effect of cash transfers and food stamp benefits on family labor supply and welfare participation among two-parent families. The Aid to Families with Dependent Children-Unemployed Parent Program has been providing cash benefits to two-parent households since 1961 and recent congressional action has increased its importance. In this model, the husband's and wife's labor supply decisions are constrained by a family budget constraint which is non-convex due to features of the AFDC-UP program. The husband's and wife's labor supply decisions are restricted to no work, part-time work and full-time work. Features of the tax and transfer programs are modeled formally using kinked budget restraints. Maximum likelihood techniques are used to estimate parameters of the underlying hours of work and welfare participation equations. The estimates from the model are used to determine the magnitude of the work disincentive effects of the AFDC-UP program, and to simulate the effects of changes in AFDC-UP benefit and eligibility rules on family labor supply and welfare participation. The results suggest that labor supply and welfare participation among two-parent families are highly responsive to changes in the benefit structure under the AFDC-UP program.
Article
Just as the Gini inequality index captures people's relative deprivation (Yitzhaki, 1979), so, we show in this paper, Gini-based progressivity and horizontal inequity indices capture individual perceptions of relative fiscal harshness and ill-fortune. In fact, we find that these links between individualistic perceptions and the measurement of the distribution and redistribution of income generalise to the family of indices based on the extended Ginis of Donaldson and Weymark (1980) and Yitzhaki (1983). Through ''leaky bucket'' experiments, we also suggest how we can parameterise the inequality aversion present in these indices. Analysis of the Canadian gross and net income distributions (conducted using recently developed statistical inference procedures) shows the distribution and the aggregation of these individual indicators of relative deprivation, fiscal harshness and ill-fortune in 1981 and in 1990. Copyright Kluwer Academic Publishers 2000