The back-bone of the modern welfare state is various forms of transfers and social insurance, financed by taxation. Through the tax and transfer system, the government seeks to improve welfare through redistribution and insurance. The optimal design of such policies is, however, still heavily debated, both among academics and policy makers, with two leading models that are very different: the generous Nordic welfare state with high taxes, high redistribution, and an ambitious government, versus the Swiss/US model with a smaller government, lower taxes, and more inequality. This research project brings modern macroeconomic tools to bear on the fundamental question of how to optimally design the tax and transfer system. It is divided in three parts.
In the first part we will study the potential benefits from gender based and family based taxation. Existing studies of optimal taxation in quantitative macro models have mostly been conducted in single household models, not taking into account the joint labor supply decision, the insurance from the spouse, or the possible effect of public policy on the decision to divorce.
In the second part we ask what are the implications for optimal taxation and the optimal design of public pension systems if consumers are not able to perfectly monitor their consumption and save optimally for retirement? We will, as the first paper, introduce bounded rationality in an otherwise standard macro, overlapping generations model with incomplete markets.
In the third part we develop a new methodology to study a central, and so far unanswered, question in macro-public finance: What is the optimal path of taxation, taking into account that individuals are heterogeneous and the tradeoffs between insurance, redistribution and efficiency? Whereas the literature has largely been limited to choosing policies that maximize steady state welfare only, we instead characterize the optimal policy along the full transition path.
The published results of the project is so far one paper in Quantitative Economics. This paper developed the model that we are using to study optimal taxation of families under part one. Furthemore we have a working paper (still preliminary) that studies optimal taxation of families, which was presented for the first time at an online family macro workshop in June. We argue that a relatively progressive tax system with separate taxation of couples lead to higher labor force participation, tax revenues and welfare than what can be achieved with the current U.S. system. We show empirically that the is a strong positive relationship between tax progressivity, tax jointness and labor force participation across countries. Under part three we have a complete polished paper on dynamically optimal taxation, which we have presented at seminars and conferences. We have submitted this paper to one of the top economics journals (American Economic Review) and are waiting to hear back. We are also working on part two.
Resultatene i prosjektet kan (burde) få betydning for utformingen av skattesystemet i ulike land. For eksempel burde land med felles beskatning av par gå over til separat beskatning. Om dette faktisk skjer gjenstår å se.
This research project takes a modern macroeconomic approach to optimal taxation. It will advance the literature in several ways theoretically, by relaxing limiting assumptions and developing an entirely new method to study dynamically optimal taxation, and empirically, by using the unique Norwegian register data to for estimation.
Part one asks what are the potential welfare gains from basing taxes on gender and marital status? It develops, and estimates a model with rich household heterogeneity: single and married households and endogenous transitions between these states. It then studies optimal taxation, taking these characteristics into account.
Part two asks how are the welfare effects of taxation and social security affected if consumers are rationally inattentive (i.e. they find it costly to evaluate information and make new decisions). As the first paper, we introduce bounded rationality in an otherwise standard macro, overlapping generations model with incomplete markets.
The third part of the project develops a new methodology which can overcome the computational difficulties, which have so far prevented the literature from addressing the problem of finding the optimal path of taxation. We solve the dynamic optimal Ramsey taxation problem in a model with incomplete markets, where the government commits itself ex-ante to a time path of labor taxes, capital taxes, transfers and debt to maximize the discounted sum of agents' utility starting from today. Whereas the literature has largely been limited to choosing policies that maximize steady state welfare only, we instead characterize the optimal policy along the full transition path.