Essays on Income Taxation

Abstract: This thesis contributes to the study of income taxation. It consists of three self- contained papers.The first paper, Should Natives and Immigrants Face Different Income Tax Schedules, computes how optimal income tax schedules optimally should be differentiated between immigrants and natives. I use a calibrated optimal tax model with heterogeneous labor supply elasticities across and within groups and employ Utilitarian and Rawlsian social welfare functions. As compared to an optimal tax system that treats both groups the same, the optimal differentiated tax system increases marginal tax rates for the majority of natives, with a decrease in the marginal tax rates of immigrants. However, there is not much redistribution between the groups.The second paper, Earnings Responses to Even Higher Taxes. Specifically, we exploit a recent Swedish tax reform, implying higher marginal tax rates for the top 5% of the earnings distribution, to learn about earnings responses in an economy where taxes already are high. Using a simple and graphical cross sectional method, we estimate medium run earnings elasticities in the range 0.1-0.14. Such responses indicate that Sweden operates close to, or even above, the peak of the Laffer curve, while the United States is far below. We interpret the essential features of the response using a simulation model in which people have noisy perceptions of the piece-wise linear tax code.The third paper, Optimal Labor Income Taxation, studies The Role of the Skill Distribution. Specifically, I analyze the role of the distribution of skills in shaping optimal nonlinear income tax schedules. I use theoretical skill distributions as well as empirical skill distributions for 14 OECD countries. I find that a more dispersed log-normal skill distribution implies a more progressive optimal tax schedule. Optimal tax rates should be lower throughout if a greater number of unskilled agents cluster at the bottom, and the scheme is more progressive if a greater number of agents locate at the top. I also highlight how the impact of the skill distribution is affected by the form of the social welfare function and the utility function. The findings using empirical skill distributions suggest that the results are sensitive to the type of statistical estimator used to estimate the skill distribution.

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