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Working Paper
02.13.2023 |
WP 20-18R2
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 households experience a welfare gain.
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Working Paper
02.09.2023 |
WP 23-07
We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. The optimal fiscal policy funds a transfer that is nearly 50 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate but is also moderately progressive. We find an identical outcome when policy is instead determined by majority voting. Finally, we offer suggestive empirical evidence that households’ preferences for tax and redistribution are more strongly associated with political identity than economic status.
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Working Paper
11.29.2022 |
WP 19-18R
What drives the dynamics of the racial wealth gap? We answer this question using a dynamic stochastic general equilibrium heterogeneous-agents model. Our calibrated model endogenously produces a racial wealth gap matching that observed in recent decades along with key features of the current cross-sectional distribution of wealth, earnings, intergenerational transfers, and race. Our model predicts that equalizing earnings is by far the most important mechanism for permanently closing the racial wealth gap. One-time wealth transfers have only transitory effects unless they address the racial earnings gap, and return gaps only matter when earnings inequality is reduced.
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Working Paper
02.14.2022 |
WP 20-18R
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 labor and capital income taxes and increase transfers, 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 and low-income workers, while only wealthy households experience a welfare gain.
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Working Paper
06.22.2020 |
WP 20-18
What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.
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Working Paper
10.08.2019 |
WP 19-18
We reconcile the large and persistent racial wealth gap with the smaller racial earnings gap, using a general equilibrium heterogeneous-agents model that matches racial differences in earnings, wealth, bequests, and returns to savings. Given initial racial wealth inequality in 1962, our model attributes the slow convergence of the racial wealth gap primarily to earnings, with much smaller roles for bequests or returns to savings. Cross-sectional regressions of wealth on earnings using simulated data produce the same racial gap documented in the literature. One-time wealth transfers have only transitory effects unless they address the racial earnings gap.
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Working Paper
10.08.2019 |
WP 1808R
Why do high-income black households live in neighborhoods with characteristics similar to those of low-income white households? We find that neighborhood sorting by income and race cannot be explained by financial constraints: High-income, high-wealth black households live in similar-quality neighborhoods as low-income, low-wealth white households. We provide evidence that black households sort across neighborhoods according to some non-pecuniary factor(s) correlated with the racial composition of neighborhoods. Black households sorting into black neighborhoods can explain the racial gap in neighborhood quality at all income levels. The supply of high-quality black neighborhoods drives the neighborhood quality of black households.
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Working Paper
09.25.2019 |
WP 14-42R2
We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes.
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Working Paper
09.23.2019 |
WP 19-06R2
How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 57 percent larger than those in the highest wealth decile.
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Working Paper
07.19.2019 |
WP 19-06R
How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.
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Working Paper
03.22.2019 |
WP 19-06
How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.
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Working Paper
06.13.2018 |
WP 18-08
Why do high-income blacks live in neighborhoods with characteristics similar to those of low-income whites? One plausible explanation is wealth, since homeownership requires some wealth, and black households hold less wealth than white households at all levels of income. We present evidence against this hypothesis by showing that wealth does not predict sorting into neighborhood quality once race and income are taken into account. An alternative explanation is that the scarcity of high-quality black neighborhoods increases the cost of living in a high-quality neighborhood for black households with even weak race preferences. We present evidence in favor of this hypothesis by showing that sorting into neighborhood racial composition is similar across wealth levels conditional on race and income.
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Working Paper
09.06.2017 |
WP 14-32R2
In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.
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Working Paper
09.06.2017 |
WP 14-42R
We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.
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Working Paper
12.23.2016 |
WP 16-34
This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model's performance for wealth mobility. Finally, we introduce state-contingent assets, which allow households to partially span the space of labor productivity. Moving toward a more
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Working Paper
10.21.2015 |
WP 15-25
This paper studies related counterfactual policies using an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation.
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Working Paper
04.17.2015 |
WP 14-32R
A study of the effects on inequality of a
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Working Paper
12.31.2014 |
WP 14-42
We study the tax systems that arise in a once-and-for-all majority voting equilibrium embedded within a macroeconomic model of inequality.
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Working Paper
12.02.2014 |
WP 14-32
A study of the effects on inequality of a
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Working Paper
02.01.2013 |
WP 12-12R2
This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities.
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Working Paper
11.01.2012 |
WP 12-12R1
This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities.
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Working Paper
05.09.2012 |
WP 12-12
This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities.
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Working Paper
02.04.2011 |
WP 11-06
This paper examines the degree of income tax progressivity chosen through a simple majority vote in a model with savings.
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Working Paper
12.01.2009 |
WP 09-13
This paper compares the steady state outcomes of revenue-neutral changes to the progressivity of the tax schedule.
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Working Paper
07.01.2009 |
WP 09-06
This paper studies sunspot fluctuations in a model with heterogeneous households.