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Taxation, Automation and Labor Markets

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Atlanta Marriott Marquis, L506
Hosted By: Econometric Society
  • Chair: Carlos da Costa, Getulio Vargas Foundation

Taxation and Organization of Knowledge

Marek Kapicka
,
CERGE-EI
Ctirad Slavik
,
Charles University-Prague

Abstract

We study how income taxation interacts with the organization of knowledge and production, and ultimately the distribution of wages in the economy. A more pro- gressive tax system reduces the time that managers allocate to work, which makes the organization of production less efficient and reduces wages at both tails of the distribution. As a result, lower tail wage inequality increases and upper tail wage inequality decreases.
We show that the optimal tax system is significantly less progressive than if wages were exogenous, because less progressive tax system also generates less unequal wage distribution.

Investment-Specific Technological Change, Taxation and Inequality in the U.S.

Pedro Brinca
,
Nova University of Lisbon
Joao Duarte
,
University of Cambridge
João Oliveira
,
Nova University of Lisbon

Abstract

Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15\% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16\%.

Artificial Intelligence and Worker-Replacing Technological Progress

Anton Korinek
,
Johns Hopkins University
Joseph Stiglitz
,
Columbia University

Abstract

Abstract Technologists predict that in coming decades, artificially intelligent machines will increasingly replace human labor and, once they surpass human levels of general intelligence, will make human labor redundant. We study the implications of this transition for wages and economic growth and examine under what conditions policy can ensure that technological progress generates a Pareto improvement. We find several results. First, once machines surpass humans, the economy will experience a singularity in which machines producing more machines generate an explosion in labor supply and lead to exponential economic growth. Secondly, however, growth may eventually be limited by irreproducible scarce factors, e.g. land and energy, which would cause real wages to plummet, leading to increasing inequality among workers and other factor owners. Third, by imposing non-distortionary taxes on these irreproducible factors, we can generate a Pareto improvement, i.e. ensure everybody in the economy is better off. If such redistribution is not possible, then interventions to direct technological progress may act as a second-best device to limit the losses of workers.

Optimal Capital Income Taxation Under Capital-Skill Complementarity

ozlem kina
,
European University Institute
Ctirad Slavik
,
Charles University-Prague
Hakki Yazici
,
Sabanci University

Abstract

This paper analyses the implications of capital-skill complementarity for optimal capital
taxation from the perspective of a redistributive government. To do so, we build
two infinite horizon incomplete markets models which are identical except for their aggregate production functions. In both models, there are two types of workers: skilled
and unskilled. The first model features a production function with capital-skill complementarity whereas the second model has a standard Cobb-Douglas production function.
Under capital-skill complementarity, a decrease in the stock of aggregate capital decreases the skill premium, thereby creating indirect redistribution from the skilled agents to the unskilled ones. This creates an additional motive to tax capital in the model with complementarity. Thus, optimal capital tax rate is higher in the economy with capital-skill complementarity.
To evaluate the quantitative significance of capital-skill complementarity for optimal
capital taxation, we calibrate each model separately to match the U.S. economy along
selected dimensions under existing capital and labor income taxes. Then, we solve for
optimal capital and labor taxes in both models as those that maximize a Utilitarian social
welfare function that puts an equal weight on all agents. The optimal capital income
tax rate is 54% in the model with capital-skill complementarity and 42% in the model
without complementarity. Optimal labor income taxes are approximately equal in the
two models at 38%. We conclude that the presence of capital-skill complementarity introduces a quantitatively significant role for capital taxation.

Redistribution with Labor Markets Frictions

Carlos da Costa
,
Getulio Vargas Foundation
Lucas Maestri
,
Getulio Vargas Foundation (FGV/EPGE)
Marcelo Santos
,
INSPER

Abstract

How does the presence of labor market frictions affect optimal redistributive policies?
Embedding an otherwise standard Mirrlees' economy in a directed search environment, we characterize constrained efficient allocations and show that distortions in labor supply the intensive and extensive margins always share the same sign.
In contrast with the no frictions economy, incentive compatibility does not imply monotonicity in effort. We show that efficiency does.
We ask whether labor income tax schedules suffice to implement constrained allocations.
After showing that it does not, we derive a policy that: i) improves upon the current US system, and; ii) cannot be improved by local reforms. We quantify the gains from moving to such policy.
Discussant(s)
Carlos da Costa
,
Getulio Vargas Foundation
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • J0 - General