Matt Weinzierl - Job Market Candidate
- The Surprising Power of Age-Dependent Taxes,
Job market paper
Abstract: I study age-dependent labor income taxes as a partial reform in a Mirrleesian dynamic taxation environment. Despite its simplicity, age dependence generates a large welfare gain both in absolute size and relative to more complex, fully optimal policy. Using modern dynamic optimal tax methods, I provide a comprehensive theoretical and quantitative examination of age dependence and compare it to two alternative policies: an age-independent policy and a dynamic optimal policy.
First, I derive theoretical results for this partial reform that connect to and extend classic results and intuition from static and dynamic Mirrleesian tax analysis. I analytically characterize how age dependence improves on age-independent policy but falls short of the dynamic optimum on both the intratemporal consumption-leisure and intertemporal savings margins.
Second, using detailed individual wage data from the U.S. PSID, I calibrate and simulate the policy models, generating robust implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers, and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. These results capture key features of the dynamic optimal policy.
Finally, I quantify the welfare gain from this partial reform. Age dependence yields a large welfare gain equal to between one and three percent of aggregate annual consumption, and it captures a substantial portion of the gain from reform to the dynamic optimal policy. A detailed decomposition reveals that improvements in efficiency and equity each account for approximately half of this gain. To further motivate its practicality, I add the constraint that age dependence must be Pareto improving. This more constrained reform generates nearly as large a welfare gain as does the Utilitarian-optimal policy.
- The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution, (with Greg Mankiw)
Working Paper, version as of December, 2007
Abstract: Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard Utilitarian framework for tax policy analysis answers this question in the affirmative. Moreover, based on the empirical distribution of height and wages, the optimal height tax is substantial: a tall person earning $50,000 should pay about $4,500 more in taxes than a short person earning the same income. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively, if policies such as a tax on height are rejected, then the standard Utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.
- Incorporating Preference Heterogeneity into Optimal Tax Models
Working Paper, available on request
Abstract: This paper proposes a method for incorporating an important type of preference heterogeneity into modern optimal tax analyses and studies the implications of this heterogeneity for policy. Mirrleesian optimal tax analysis intentionally neglects preference heterogeneity because of ambiguity in how to cardinalize preferences in the utility function that guides policymaking. This paper avoids that ambiguity by focusing on a class of preferences that implies a particular cardinalization: those against which individuals do not want to be insured. This class of preferences is of fundamental importance to tax design, forming the basis of a long-standing critique of redistributive taxation advanced by Milton Friedman, among others. After showing how to incorporate this class of preferences in the standard optimal tax model, this paper derives implications for optimal labor income taxes, capital income taxes, and social insurance programs, yielding substantial departures from the standard model's results. Finally, the paper presents cross-country evidence on preference variation and policy differences that is consistent with the model.
- Optimal Intertemporal Allocations with Heterogeneous Intergenerational Altruism
Working Paper, available on request
Abstract: How should policy respond to differences across families in parents’ willingness to sacrifice for their children? The conventional optimal policy model gives a clear answer: policy should do nothing to offset such differences. Recent theoretical work on social mobility has questioned this answer by arguing that the government ought to care about future generations more than does the average current individual, diluting differences across families by inserting a uniform “societal” welfare weight on all children. The resulting policy would try to partially offset differences across families. This paper presents an alternative answer based on a careful application of the Vickrey-Harsanyi-Rawls veil of ignorance, the normative foundation of conventional optimal policy models with only one generation. If parents are concerned for their children as individuals and the veil of ignorance is applied to each child and parent as an individual, the ex ante efficient social welfare function assigns an equal weight to all children, regardless of their ex post parents’ preferences. This implies that policy should attempt to fully offset differences across families, even though the government places no independent societal welfare weight on future generations. This conclusion undermines the case for short-term intergenerational welfare links derived in conventional analyses.
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© 2007 by the President and Fellows of Harvard College