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Working Paper
Unequal Climate Policy in an Unequal World
Hur, Sewon; Carroll, Daniel R.; Belfiori, Elisa (2025-01-31)
We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a flat carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. We show that the constrained optimal carbon tax in a heterogeneous economy is heterogeneous: Higher-income households face a ...
Globalization Institute Working Papers , Paper 427

Report
Practical Optimal Income Taxation
Heathcote, Jonathan; Tsujiyama, Hitoshi (2021-07-30)
We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to ...
Staff Report , Paper 626

Working Paper
Capital Taxation with Heterogeneous Discounting and Collateralized Borrowing
Biljanovska, Nina; Vardoulakis, Alexandros (2017-05-05)
We study optimal long-run capital taxation in a closed economy with heterogeneity in agents' time-discount factors where borrowing is allowed but restricted by a collateral constraint. Financial frictions distort intertemporal optimization margins and the tax system serves a dual role: first, it is used to finance government consumption; second, it serves to alleviate the distortions arising from the binding collateral constraint. The discrepancy between the private and the social discount factors pushes for a subsidy on capital, while the discrepancy introduced by the collateral constraint ...
Finance and Economics Discussion Series , Paper 2017-053

Working Paper
Optimal Time-Consistent Taxation with Default
Karantounias, Anastasios G. (2017-11-01)
We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs, thereby introducing some state-contingency to debt. We are motivated by the fact that domestic sovereign default is an empirically relevant phenomenon, as Reinhart and Rogoff (2011) demonstrated. Optimal policy is characterized by two opposing incentives: an incentive to ...
FRB Atlanta Working Paper , Paper 2017-12

Working Paper
Doubts about the Model and Optimal Policy
Karantounias, Anastasios G. (2020-07-31)
This paper analyzes optimal policy in setups where both the leader and the follower have doubts about the probability model of uncertainty. I illustrate the methodology in two environments: a) an industry populated with a large firm and many small firms in a competitive fringe, where both types of firms doubt the probability model of demand shocks, and b) a general equilibrium economy, where a policymaker taxes linearly the labor income of a representative household in order to finance an exogenous stream of stochastic spending shocks. The policymaker can distrust the probability model of ...
FRB Atlanta Working Paper , Paper 2020-12

Report
Optimal Income Taxation: Mirrlees Meets Ramsey
Tsujiyama, Hitoshi; Heathcote, Jonathan (2015-01-22)
What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate ...
Staff Report , Paper 507

Working Paper
A Quantitative Theory of Time-Consistent Unemployment Insurance
Pei, Yun; Xie, Zoe (2016-11-01)
During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these extensions. Because of the trade-off between insurance and ...
FRB Atlanta Working Paper , Paper 2016-11

Working Paper
On the Distributional Effects of International Tariffs
Carroll, Daniel R.; Hur, Sewon (2023-02-13)
We provide a quantitative analysis of the distributional effects of the 2018 increase in tariffs by the US and its major trading partners. We build a trade model with incomplete asset markets and households that are heterogeneous in their age, income, wealth, and labor skill. When tariff revenues are used to reduce distortionary taxes on consumption, labor, and capital income, the average welfare loss from the trade war is equivalent to a permanent 0.1 percent reduction in consumption. Much larger welfare losses are concentrated among retirees and low-wealth households, while only wealthy ...
Working Papers , Paper 20-18R2

Working Paper
Does Access to Free Pre-Kindergarten Increase Maternal Labor Supply?
Ilin, Elias; Shampine, Samantha; Terry, Ellyn (2022-02-02)
In this paper, we evaluate the effects of free pre-kindergarten (pre-K) programs on the labor force participation (LFP) of mothers. We use variation in pre-K rules across all US states, including income eligibility requirements in some states. To estimate the causal effects of access to pre-K on labor supply, we exploit the panel aspect of the monthly Current Population Survey between 2002 and 2019. Specifically, we look at the change in labor market behavior of women when their child becomes age-eligible for pre-K, controlling for individual factors. We find that access to free pre-K ...
FRB Atlanta Working Paper , Paper 2022-3

Working Paper
Optimal Social Insurance and Rising Labor Market Risk
Scheffel, Martin; Krebs, Tom (2019-02-01)
This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 18

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