Heterogeneous Labor Skills, The Median Voter and Labor Taxes

Anderson L. Schneider and Facundo Piguillem
Additional contact information
Anderson L. Schneider: University of Minnesota and Federal Reserve Bank of Minneapolis

No 835, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: We consider an infinite horizon economy in which agents are potentially heterogeneous with respect to both initial wealth and labor skills. We study indirect preferences over redistributive fiscal policies - sequences of affine taxes on labor and capital income - that can be supported as competitive equilibria. The first result is the following. Assume balanced growth preferences. If there is no heterogeneity in labor skills, then independent of the distribution of initial endowments, the best fiscal policy for the agent with the median endowment is preferred to any other policy by at least half of the individuals in the economy. If we allow for heterogeneity in labor skills, and initial capital holdings are an affine function of skills, then again, the most preferred time path of policies is preferred by a majority. When we allow for heterogeneity in skills, the second result provides the characterization of the most preferred tax sequence by the median agent: marginal taxes on labor depend directly on the absolute value of the distance between the median and the mean value of the skill distribution. The above results are extended to an economy in which the distribution of skills evolves stochastically over time and the ranking among agents is preserved. We find that a temporary increase in inequality could imply either higher or lower labor taxes, depending on the sign and level of the correlation between inequality and aggregate labor. Finally, we solved and simulated a calibrated stochastic version of the economy with capital accumulation. The volatility of labor taxes is much higher than the one found in the literature on optimal taxation. Regarding capital taxation, the bang-bang result holds as in Bassetto and Benhabib (2006).

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Heterogeneous Labor Skills, The Median Voter and Labor Taxes (2013)
Working Paper: Heterogeneous Labor Skills, The Median Voter and Labor Taxes (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed008:835

Access Statistics for this paper

More papers in 2008 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().