Two Essays in Public Economics

Abstract: This thesis consists of two self-contained essays. Essay I. I compute 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. Essay II. (with Håkan Selin and Martin Söderström)Sweden introduced a phase-out of the earned income tax credit in 2016. As a consequence, taxpayers belonging to the top 5 percent of the earnings distribution, already facing high taxes, experienced a 7% reduction in their net-of-tax shares. While exploiting rich full-population administrative data up to 2017, we evaluate earnings responses to the reform. When graphically and econometrically comparing earnings growth at different segments of the distribution, we estimate a significant relative earnings reduction in the treatment group immediately appearing in 2016, and growing in 2017. The implied earnings elasticity is fairly low and around 0.1. 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. To simulate the empirically observed response, we need to add more noise to perceptions than what is motivated by earnings uncertainty alone.