Taxation and Sources of Inequality

Speaker: A/Prof Yena Park 

Affiliation: Seoul National University

Online via Zoom: https://uqz.zoom.us/j/82603079317 

Abstract

How should optimal tax be affected by sources of income inequality? To answer this question, we extend the Pareto efficient tax analysis in Mirrlees’ model by incorporating endogenous wage determination that can capture various sources of income inequality— return to skill, return to education, and return to effective labor supply. We show that when an inequality factor is introduced, not only earnings distribution but also earnings elasticities change, and the impact on optimal tax rates can be in the opposite directions depending on the sources of inequality. To figure out which forces dominate, we investigate structural model, and show that effects boil down to effective efficiency cost of tax distortion canceling out the counterbalancing forces. Our analysis also provides two important cautions for the sufficient statistics approach. First, when sufficient statistics approach is used for a future comparative static, estimated elasticities should be adjusted according to the expected sources of inequality. Second, when testing the current tax schedule given earnings distribution, elasticities should be estimated under the current inequality factor.

About the presenter's meeting

If you would like to meet with A/Prof Park, please contact Dr Youngsoo Jang