A Tale of Two Bases: Progressive Taxation of Capital and Labor Income

Moore, Rachel and Pecoraro, Brandon (2021): A Tale of Two Bases: Progressive Taxation of Capital and Labor Income.

Abstract

Macroeconomic models routinely abstract simultaneously from two features of the United States federal tax code: the joint taxation of ordinary capital and labor income, and the special taxation of preferential capital income. In this paper we argue that this abstraction omits a `portfolio-effect' mechanism where endogenous changes to the ordinary-preferential composition of households' capital income influence individuals' optimal labor and saving decisions through its impact on their effective marginal tax rates. We demonstrate the quantitative importance of this tax detail by simulating provisions from the recently enacted “Tax Cuts and Jobs Act” using a heterogeneous-agent overlapping generations framework.

• Item Type: MPRA Paper
• Language: English
• Keywords: dynamic scoring; tax policy modeling; heterogeneous agents
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

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