Investment-Specific Technological Change, Taxation and Inequality in the U.S.

Brinca, Pedro and Duarte, João B. and Holter, Hans A. and Oliveira, João G. (2019): Investment-Specific Technological Change, Taxation and Inequality in the U.S.

Abstract

Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%.

• Item Type: MPRA Paper
• Language: English
• Keywords: Income Inequality, Taxation, Automation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials

References

[1] Acemoglu, D. and Restrepo, P. (2017a). Low-Skill and High-Skill Automation. NBER Working Papers 24119, National Bureau of Economic Research, Inc.

[2] Acemoglu, D. and Restrepo, P. (2017b). Robots and jobs: Evidence from us labor markets. Working Paper 23285, National Bureau of Economic Research.

[3] Acemoglu, D. and Restrepo, P. (2018). Artificial Intelligence, Automation and Work. Boston University - Department of Economics - Working Papers Series dp-298, Boston University - Department of Economics.

[4] Aiyagari, S. R. (1995). Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting. Journal of Political Economy, 103(6):1158–1175.

[5] Autor, D. and Acemoglu, D. (2011). Skills, tasks and technologies: Implications for employment and earnings. In Handbook of Labor Economics. Elsevier.

[6] Autor, D. H., Levy, F., and Murnane, R. J. (2003). The Skill Content of Recent Technological Change: An Empirical Exploration. The Quarterly Journal of Economics, 18(4):1279– 1333.

[7] Benabou, R. (2002). Tax and education policy in a heterogeneous agent economy: What levels of redistribution maximize growth and efficiency? Econometrica, 70:481–517.

[8] Brinca, P., Faria-e Castro, M., Ferreira, M. H., and Holter, H. A. (2019). The nonlinear effects of fiscal policy. Working Paper.

[9] Brinca, P., Holter, H. A., Krusell, P., and Malafry, L. (2016). Fiscal multipliers in the 21st century. Journal of Monetary Economics, 77:53–69.

[10] Brinca, P., Homem Ferreira, M., Franco, F. A., Holter, H. A., and Malafry, L. (2018). Fiscal consolidation programs and income inequality. Available at SSRN 3071357.

[11] Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54(3):607–622.

[12] Civale, S. (2016). Has the Decline in the Price of Investment Increased Wealth Inequality? Unpublished.

[13] Cortes, G. M., Jaimovich, N., Nekarda, C. J., and Siu, H. E. (2016). The Micro and Macro of Disappearing Routine Jobs: A Flows Approach. NBER Working Papers 20307, National Bureau of Economic Research, Inc.

[14] Delaney, K. J. (2017). Droid duties: The robot that takes your job should pay taxes, says bill gates. Quartz. [15] Eden, M. and Gaggl, P. (2018). On the welfare implications of automation. Review of Economic Dynamics, 29:15 – 43.

[16] Ferriere, A. and Navarro, G. (2018). The Heterogeneous Effects of Government Spending: It’s All About Taxes. Working paper.

[17] Flood, S., King, M., Rodgers, R., Ruggles, S., and Warren, J. R. (2018). Integrated public use microdata series, current population survey: Version 6.0 [dataset].

[18] Greenwood, J., Hercowitz, Z., and Krusell, P. (1997). Long-Run Implications of Investment-Specific Technological Change. American Economic Review, 87(3):342–362.

[19] Guerreiro, J., Rebelo, S., and Teles, P. (2017). Should robots be taxed? NBER Working Paper.

[20] Holter, H. A., Krueger, D., and Stepanchuk, S. (2014). How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? PIER Working Paper Archive 14-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

[21] Hubmer, J., Krusell, P., and Smith Jr, A. A. (2017). The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation. CEPR Discussion Papers 11743, C.E.P.R. Discussion Papers.

[22] Karabarbounis, L. and Neiman, B. (2014). The global decline of the labor share. The Quarterly Journal of Economics, 129(1):61–103.

[23] Krusell, P., Mukoyama, T., and ¸Sahin, A. (2010). Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations. Review of Economic Studies, 77(4):1477–1507.

[24] Krusell, P., Ohanian, L. E., Ríos-Rull, J. V., and Violante, G. L. (2000). Capital-skill complementarity and inequality: A macroeconomic analysis. Econometrica, 68(5):1029–1053.

[25] Lucas, R. E. (1990). Supply-side economics: An analytical review. Oxford Economic Papers, New Series.

[26] Mendoza, E., Razin, A., and Tesar, L. (1994). Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34(3):297–323.

[26] Michaels, G., Natraj, A., and Reenen, J. V. (2010). Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 years. NBER Working Papers 16138, National Bureau of Economic Research, Inc.

[27] Mirrlees, J. A. (1971). An Exploration in the Theory of Optimum Income Taxation. Review of Economic Studies, 38(2):175–208.