Essays on the Economics of Income Taxation

Abstract: This thesis consists of five self-contained essays.Essay 1. (with Sören Blomquist and Luca Micheletto) Using a calibrated overlapping-generations model we quantify the welfare gains of an age-dependent labor income tax. Agents face uncertainty regarding future abilities and can transfer consumption across periods through savings. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax varies between 2.4% and 4% of GDP. Part of the welfare gain is due to capital accumulation effects and part descends from relaxing incentive-compatibility constraints. The welfare gain is of about the same magnitude as the welfare gain that can be achieved by moving from a linear- to a nonlinear labor income tax. Finally, the welfare loss from tax-exempting interest income is negligible under an optimal age-dependent labor income tax.Essay 2. (with Sören Blomquist and Luca Micheletto)Previous literature has shown that public provision of private goods can be a welfare-enhancing device in second-best settings where governments pursue redistributive goals. However, three issues have so far been neglected. First, the case for supplementing an optimal nonlinear income tax with public provision of private goods has been made in models where agents differ only in terms of market ability. Second, the magnitude of the welfare gains achievable through public provision schemes has not been assessed. Third, the similarities/differences between public provision schemes and tagging schemes have not been thoroughly analyzed. Our purpose in this paper is therefore threefold: first, to extend previous contributions by incorporating in the theoretical analysis both heterogeneity in market ability and in the need for the publicly provided good; second, to perform numerical simulations to quantify the size of the potential welfare gains achievable by introducing a public provision scheme, and to characterize the conditions under which these welfare gains are sizeable; finally, to compare the welfare gains from public provision with the welfare gains from tagging. Essay 3. (with Sören Blomquist and Luca Micheletto)Subsidized child care is a common phenomenon in both Europe and the United States. In this paper we study the efficiency of some of the most common types of child care subsidies. These are a (refundable) tax credit, tax deductibility and public provision. We evaluate the relative efficiency of these instruments using a quantitative simulation model calibrated to resemble the US economy. In our framework there is a special tax treatment for families with children of child care age, which is based on an assumption that agrees with facts pertaining to actual circumstances in the United States, as well as many other countries. We keep the net tax revenue for this group of tax payers constant, hence the subsidies to child care are paid for by the group itself. It is a commonly held view that in a 'good society' all children should have equal opportunities in life. Many proponents of subsidized childcare argue that one way to move in this direction is to allow all children access to good quality child care. We capture this ideological perspective by using a paternalistic social welfare function which places special emphasis on the quality of child care purchased by households. Using a standard social welfare function we find tax deductibility to be the most efficient instrument to subsidize child care and public provision the least efficient instrument. These results are completely reversed when using the paternalistic welfare function and when  society has the goal of providing all children with access to good quality child care.  Public provision then becomes the best way to subsidize child care.  An important aspect of public provision is that it is an efficient instrument in raising the quality of child care. Essay 4.  In a recent paper Alesina et al. (2011) construct a model in which different labor supply elasticities for men and women emerge endogenously from intra-household bargaining. In this paper I explore the optimal tax implications of their model in an economy with both singles and couples and inequality across as well as within households. In the model, the welfare of married women can be improved by lowering taxes for single women. However, this benefit must be weighed against the welfare cost of taxing single men and women at different rates. Moreover, if single men earn more than single women, the welfare of married women can alternatively be improved by a gender-neutral tax scheme which taxes singles at a higher rate. Because the government is concerned not only with equalizing utilities within families, but also with the redistribution between high income and low income households, gender-based adjustments in the income tax must be weighed against the welfare consequences of changing the progressivity of the tax system. I find that larger lump-sum transfers to women is always optimal. Interestingly, marginal tax rates, on the other hand, should be lower for women only if the exogenous bargaining power of men is moderate. The welfare gains of gender based taxation are sizable and the welfare gains of having tax instruments which depend on household composition are even larger.Essay 5. (with Håkan Selin) Recent microeconometric studies of taxpayers' responsiveness to taxation have shown that intensive margin labor supply and earnings elasticities typically are modest and sometimes equal to zero. However,a common view is that long-run responses might still be large since micro-estimates are downward biased owing to optimization frictions. In this paper we estimate the taxable income elasticity at a very large kink point of the Swedish tax schedule using the bunching method. During the period of study the change in the log net-of-tax rate reached a maximum value of 45.6%. Interestingly, we obtain a precise elasticity estimate of zero for wage earners at this large kink. The size of the kink allows us to derive tighter bounds on the long-run elasticity than previous studies. If wage earners on average tolerate 1% of their disposable income in optimization costs, the upper bound on the long-run taxable income elasticity is 0.39. We also evaluate the performance of the bunching estimator by performing Monte Carlo simulations.