The relationship between the degree of inequality and the demand for redistribution has been a central question in political science and political economy. The famous median-voter model predicts that ...higher inequality, reflected in a growing gap between the income of the average and the median voter, should lead to increased demand for redistribution, as policymakers cater to the median voter's preferences (Meltzer and Richard, 1981). Yet, using data from OECD countries, Kenworthy and McCall (2008) show that, despite increases in inequality in those countries, there was no corresponding increase in demand for redistribution. Part of the explanation of this puzzle lies in the realization that it is not only (or even mainly) reality, but perceptions that shape support for policy. This article will explore recent evidence using large-scale social economics surveys and experiments that sheds lights on beliefs about inequality, social mobility, diversity and immigration, social position, and understanding of how policies work.
Income taxes are typically set to raise revenues and redistribute income at the lowest possible efficiency costs, which result from the distortions in individual behaviors that taxes entail. ...Individuals can respond along many margins, such as labor supply, tax avoidance and evasion, and geographic mobility. But one margin that taxes may affect — innovation — is less frequently considered. Conceptually, taxes reduce the expected net returns to innovation inputs and can reduce innovation. Much like other margins of responses to taxes, this efficiency cost must be taken into account. Innovation is done by a relatively small number of people, but it is nevertheless likely to have widespread benefits. While inventors may have divergent motivations, such as social recognition or the love of discovery, they also face an economic reality. How strongly innovation responds to taxes is an empirical question that has been the subject of a growing body of recent work. In this paper, I study how to account for innovation when setting personal income and capital taxation. I distinguish between two cases: one in which the government can set a differentiated tax on inventors and one in which the government is constrained to set the same tax on all agents. I provide a model that flexibly accounts for the spillovers generated by innovation and the non-pecuniary benefits inventors receive from innovation and derive tax formulas expressed in terms of estimable sufficient statistics. The second part of the paper discusses the empirical evidence on the effects of taxes on the quantity, quality, and location of innovation, as well as tax avoidance and income shifting done through innovation.
The relationship between the degree of inequality and the demand for redistribution has been a central question in political science and political economy. The famous median-voter model predicts that ...higher inequality, reflected in a growing gap between the income of the average and the median voter, should lead to increased demand for redistribution, as policymakers cater to the median voter’s preferences (Meltzer and Richard, 1981). Yet, using data from OECD countries, Kenworthy and McCall (2008) show that, despite increases in inequality in those countries, there was no corresponding increase in demand for redistribution. Part of the explanation of this puzzle lies in the realization that it is not only (or even mainly) reality, but perceptions that shape support for policy. This article will explore recent evidence using large-scale social economics surveys and experiments that sheds lights on beliefs about inequality, social mobility, diversity and immigration, social position, and understanding of how policies work.
Income taxes are typically set to raise revenues and redistribute income at the lowest possible efficiency costs, which result from the distortions in individual behaviors that taxes entail. ...Individuals can respond along many margins, such as labor supply, tax avoidance and evasion, and geographic mobility. But one margin that taxes may affect - innovation - is less frequently considered. Conceptually, taxes reduce the expected net returns to innovation inputs and can reduce innovation. Much like other margins of responses to taxes, this efficiency cost must be taken into account. Innovation is done by a relatively small number of people, but it is nevertheless likely to have widespread benefits. While inventors may have divergent motivations, such as social recognition or the love of discovery, they also face an economic reality. How strongly innovation responds to taxes is an empirical question that has been the subject of a growing body of recent work. In this paper, I study how to account for innovation when setting personal income and capital taxation. I distinguish between two cases: one in which the government can set a differentiated tax on inventors and one in which the government is constrained to set the same tax on all agents. I provide a model that flexibly accounts for the spillovers generated by innovation and the non-pecuniary benefits inventors receive from innovation and derive tax formulas expressed in terms of estimable sufficient statistics. The second part of the paper discusses the empirical evidence on the effects of taxes on the quantity, quality, and location of innovation, as well as tax avoidance and income shifting done through innovation.
Working Paper No. 24466 An inventor's own knowledge is a key input in the innovation process. This knowledge can be built by interacting with and learning from others. This paper uses a new ...large-scale panel dataset on European inventors matched to their employers and patents. We document key empirical facts on inventors' productivity over the life cycle, inventors' research teams, and interactions with other inventors. Among others, most patents are the result of collaborative work. Interactions with better inventors are very strongly correlated with higher subsequent productivity. These facts motivate the main ingredients of our new innovation-led endogenous growth model, in which innovations are produced by heterogeneous research teams of inventors using inventor knowledge. The evolution of an inventor's knowledge is explained through the lens of a diffusion model in which inventors can learn in two ways: By interacting with others at an endogenously chosen rate; and from an external, age-dependent source that captures alternative learning channels, such as learning-by-doing. Thus, our knowledge diffusion model nests inside the innovation-based endogenous growth model. We estimate the model, which fits the data very closely, and use it to perform several policy exercises, such as quantifying the large importance of interactions for growth, studying the effects of reducing interaction costs (e.g., through IT or infrastructure), and comparing the learning and innovation processes of different countries.
I study how people understand, reason, and learn about two major tax policies: income taxation and estate taxation. Using large-scale Social Economics surveys issued to representative U.S. samples ...and associated experiments, I seek to elicit respondents' factual knowledge about tax policy and the income or wealth distributions. Most importantly, I study their understanding of the mechanisms of tax policy and the reasoning that underlies their policy views. In decomposing policy views, I find that support for income and estate taxes is most strongly correlated with social preferences, i.e., the perceived benefits of redistribution and concerns around the fairness of inequality and taxation, as well as with broader views of the government. Efficiency concerns play a more minor role. These correlational patterns are confirmed by the experimental approach, which shows people instructional videos that explain the workings and consequences of one of the aspects of tax policy (the "Redistribution'' and the "Efficiency'' treatments) or that bring the two together and focus on the trade-off (the "Economist'' treatment). The Redistribution and Economist treatments significantly increase support for more progressive income or estate taxes, while the Efficiency treatment has no effect. There are large partisan gaps in both the final policy views, and at every step of the reasoning about the underlying mechanisms of taxes. Democrats' and Republicans' divergences in tax policy views can ultimately be traced back to different normative criteria (social preferences) and views of the government, rather than to different perceptions of the efficiency implications of taxation.
Dynamic Taxation Stantcheva, Stefanie
IDEAS Working Paper Series from RePEc,
01/2020
Paper
Open access
This paper reviews recent advances in the study of dynamic taxation, considering three main approaches: the dynamic Mirrlees, the parametric Ramsey, and the sufficient statistics approaches. In the ...first approach, agents' heterogeneous abilities to earn income are private information and evolve stochastically over time. Dynamic taxes are not ex ante restricted and are set for redistribution and insurance considerations. Capital is taxed only in order to improve incentives to work. Human capital is optimally subsidized if it reduces post-tax inequality and risk on balance. The Ramsey approach specifies ex ante restricted tax instruments and adopts quantitative methods, which allows it to consider more complex and realistic economies. Capital taxes are optimal when age-dependent labor income taxes are not possible. The newer and tractable sufficient statistics approach derives robust tax formulas that depend on estimable elasticities and features of the income distributions. It simplifies the transitional dynamics thanks to a newly defined criterion, the ``utility-based steady state approach" that prevents the government from exploiting sluggish responses in the short-run. Capital taxes are here based on the standard equity-efficiency trade-off.
Dynamic Taxation Stantcheva, Stefanie
IDEAS Working Paper Series from RePEc,
01/2020
Paper
Open access
This paper reviews recent advances in the study of dynamic taxation, considering three main approaches: the dynamic Mirrlees, the parametric Ramsey, and the sufficient statistics approaches. In the ...first approach, agents' heterogeneous abilities to earn income are private information and evolve stochastically over time. Dynamic taxes are not ex ante restricted and are set for redistribution and insurance considerations. Capital is taxed only in order to improve incentives to work. Human capital is optimally subsidized if it reduces post-tax inequality and risk on balance. The Ramsey approach specifies ex ante restricted tax instruments and adopts quantitative methods, which allows it to consider more complex and realistic economies. Capital taxes are optimal when age-dependent labor income taxes are not possible. The newer and tractable sufficient statistics approach derives robust tax formulas that depend on estimable elasticities and features of the income distributions. It simplifies the transitional dynamics thanks to a newly defined criterion, the “utility-based steady state approach” that prevents the government from exploiting sluggish responses in the short-run. Capital taxes are here based on the standard equity-efficiency trade-off.
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