Labor supply responses to income tax free and bracket expansions

PurposeAn important concern of economic policy analysis is how income taxes affect labor supply since this is crucial in assessing the efficiency costs of taxation and designing labor income taxation. The focus in the literature has been mostly to study the responses of high earners and women. The authors contribute to this literature by focusing more on how middle earners respond to financial incentives and whether the responses are different between men and women.Design/methodology/approachThe authors exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. The authors adopt an empirical framework that is similar to Bosch and van der Klaauw (2012) and condition on the effects of other factors, such as inflows of foreign workers that may have affected the wages, participation and working hours of native males and females. The authors also conduct various sensitivity analyses to examine the robustness of the estimates.FindingsThe authors find robust evidence that the tax reforms increased the wages of medium and high educated married males and females significantly. They also had a positive impact on work participation that was more substantial for married women, especially the medium educated. The authors estimate significant positive own wage labor supply elasticities that are small and about the same for men and women when the authors condition on the labor outcome effects of inflows of EU and non-EU foreign workers, which changed the skill distribution of the economy and had a more significant impact on female labor outcomes. Smaller wage labor supply elasticities indicate lower disincentive effects and deadweight losses from the imposition of taxes and have implications on the design of optimal taxation of men and women.Originality/valuePrevious investigations of the labor supply responses of both men and women to a given policy change have been identified mostly by exploiting changes in joint income taxation and marginal tax rates. The authors exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. The income effects of these reforms could be limited since the reduced marginal tax rates apply to only part of the income.

Higher Taxes at the Top: The Role of Entrepreneurs

This paper computes optimal top marginal tax rates in Bewley-Huggett-Aiyagari–type economies that include entrepreneurs. Consistent with the data, entrepreneurs are overrepresented at the top of the income distribution and are thus disproportionately affected by an increase in the top marginal income tax rate. The top marginal tax rate that maximizes welfare is 60 percent. While average welfare gains are positive and similar across occupations along the transition, they are larger for entrepreneurs than for workers in the long run, and this occupational gap in welfare gains after the tax increase widens with increasing income. (JEL D11, D21, D31, H21, H24, L26)

A Tale of Two Bases: Progressive Taxation of Capital and Labor Income

Macroeconomic models routinely abstract simultaneously from two features of the US federal tax code: the joint taxation of ordinary capital and labor income and the special taxation of preferential capital income. In this article, we argue that this abstraction omits a “portfolio-effect” mechanism where endogenous changes to the ordinary-preferential composition of households’ capital income influence individuals’ optimal labor and saving decisions through its impact on their effective marginal tax rates. We demonstrate the quantitative importance of this tax detail by simulating provisions from the recently enacted “Tax Cuts and Jobs Act” using a heterogeneous-agent overlapping generations framework calibrated to the US economy. Our findings imply that accounting for the detailed taxation of labor and capital income should be considered an important modeling feature for tax policy analysis.

The neutrality of taxation of investment projects in Serbia

The paper analyses the neutrality of taxation of investment projects on the example of Serbia. The aim of the research is to confirm/reject the existence of uniformity of the tax burden on investment projects that differ regarding the asset type, industry and the source of finance. The uniformity of tax burden, that is, the absence of discrimination and distortive effects of taxation, may be considered a confirmation of the tax neutrality. To investigate neutrality of taxation the analysis employed King-Fullerton framework of calculating effective marginal tax rates. The research results show that the tax treatment of investment projects in Serbia is nondiscriminatory. Marginal effective tax rates for different types of investment projects do not vary widely; that is, there are no investment projects that have a markedly favourable (unfavourable) tax treatment compared to the other types of investment projects.

The Age Pension Means Tests: Contorting Australian Retirement

Most Australian retirees are likely to be subject to the Age Pension assets or income test at some point. Evidence is that many retirees adapt their consumption to increase Age Pension entitlements, but long-term implications are difficult to determine—even if the current rules were to remain in place. This chapter evaluates the current approach to means testing against the principles set out in a Department of Social Services discussion paper on this topic. We evaluate the implied “effective marginal tax rates” (EMTRs) on the assets of part pensioners who are subject to the assets test. We find that depending on a variety of parameters such as assumed future earnings rates, demographic status, drawdown strategy and the base level of assets held, the EMTRs are high enough to explain material distortions to savings decisions of those still in employment, and the spending and investment decisions of retirees. Optimal decisions in this context require contorted retirement strategies that do not appear to be in anyone’s interest. Some possible remedies are suggested, which should include incorporating the value of the principal residence within the assets test. The chapter therefore illustrates the application of principled analysis to policy issues of this sort.

Solving the Muni Puzzle: Who Benefits from Tax Exemption of Government Debt?

I provide a new approach to measuring interest savings associated with issuing tax-exempt municipal bonds (munis) and present empirical evidence offering a solution to the long-standing “muni puzzle.” I show that the tax policy is effective and consistent with theory once I account for idiosyncratic issuer risk and investor preferences. I match tax-exempt munis to near-identical taxable munis issued by the same government at the same time with the same security characteristics to identify the slope of and the trend in implied marginal tax rates. Results of the random coefficients model, which mitigates issuer- and issuance-level unobserved effects, predict the slope of the marginal tax rate to be consistent with asset pricing theory and the tax profile of the typical muni investor. Findings also imply cyclicality over time and heterogeneity in implied marginal tax rates across issuers due to variations in idiosyncratic risk.

Impact of Monetary Policy on the Level of Economic Inequality in the United States

After the reform of the world monetary system in 1971, the competition between countries for the global market is taking place in completely new conditions. Monetary and fiscal authorities have accumulated vast experience in regulating the economy and strengthening country competitive advantages through complex mechanisms of quantitative easing, foreign exchange rates manipulation, increasing debts, etc. Overcoming the consequences of the financial crises of the 21st century every time forces monetary regulators to implement increasingly radical measures in order to save the economy by injecting enormous amounts of liquidity into the market to buy out bad corporate debts as well as government debt securities. At the same time, the questions of how monetary policy affects the level of economic inequality and who is its beneficiary are becoming more relevant.The article seeks to analyze the impact of changes in monetary policy parameters on wealth inequality in the United States. Given the cyclical nature of economic inequality, the main method of research was chosen as a graphical statistical analysis, since it allows to identify trends effectively and keep in focus more than 100-year picture of changes in the analyzed indicators. For a more holistic picture, the dynamics of economic wealth inequality level were compared not only with key indicators of monetary policy, but also with the dynamics of marginal tax rates in US.One conclusion of the research is that wealth inequality depends more on fiscal adjustment and marginal tax rates than on monetary factors. Inadequate marginal income and inheritance tax rates are factors of rising of wealth inequality in US. Changing of monetary system settings also influences on the level of wealth inequality, because it affects the valuation of financial assets, and therefore the wealth of the richest people in US. Another important conclusion is the idea that the new monetary policy, despite all fears that it is a source of growing economic inequality, is acceptable with marginal income and inheritance tax rates of about 60% and with effective macroprudential regulation of US economy.