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Optimal Taxation: A Modern Macroeconomic Approach

A three year study of optimal taxation with a modern macroeconomic approach, funded by the Research Council of Norway.

About the project

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 for estimation.

  1. Part one asks what the potential welfare gains from basing taxes on gender and marital status are. 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.
  2. Part two asks how the welfare effects of taxation and social security are 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.
  3. 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.

Objectives

The primary objective of the project is to advance the literature on optimal taxation, using a modern macroeconomic approach.

Secondary objectives are:

  • To quantify the welfare gains from basing optimal taxation on gender and marital status.
  • To develop and estimate a life-cycle model with rationally inattentive consumers and quantify the welfare gains from a public social security system in such a model.
  • To develop a new method for the study of dynamic optimal taxation in incomplete markets models

Financing

The project is funded by the Research Council of Norway under the SKATT program with NOK 2 million over a three year period from August 2018 until July 2021.

Cooperation

The project will be carried out in cooperation with Oslo Fiscal Studies (OFS).

Published Nov. 14, 2018 1:40 PM - Last modified June 14, 2019 3:01 PM