Welfare State and Taxation


2023 - n° 156

It is widely acknowledged that the quest for social status can result in an inefficient consumption ”rat-race” and the existing literature has discussed how taxes can mitigate the associated externalities. We suggest a new reason to tax conspicuous consumption. Our paper highlights that taxing status goods can achieve a more equitable distribution of welfare by compressing the status distribution. By curbing the conspicuous consumption of the wealthy, the government renders signaling less informative and increases the share of the social status surplus derived by the less wealthy. This ”status channel” serves as a complement to traditional monetary channels of redistribution.

Spencer Bastani; Tomer Blumkin; Luca Micheletto
Keywords: Optimal taxation, Signaling, Status


2022 - n° 154

We study the joint design of nonlinear income and education taxes when the government pursues redistributive objectives. A key feature of our setup is that the ability type of an agent can affect both the costs and benefits of acquiring education. Market remuneration of agents depends on both their innate ability type and their educational choices. Our focus is on the properties of constrained efficient allocations when educational choices are publicly observable at the individual level, but earned income is subject to misreporting. We find that income-misreporting (IM) affects the optimal distortions on income and education and shed light on the reasons for it and mechanisms through which it is done. We show how and why IM strengthens the case for downward distorting the educational choices of low-ability agents. Finally, we find that IM provides another mechanism that makes commodity taxation useful.

Spencer Bastani, Firouz Gahvariy, Luca Micheletto
Keywords: Optimal taxation; education; human capital; income-misreporting; redistribution.


2021 - n° 143
We here address the causal relationship between maternal depression and child human capital using UK cohort data. We exploit the conditionally-exogenous variation in mothers’ genomes in an instrumental-variable approach, and describe the conditions under which mother’s genetic variants can be used as valid instruments. An additional episode of maternal depression between the child’s birth up to age nine reduces both their cognitive and non-cognitive skills by 20 to 45% of a SD throughout adolescence. Our results are robust to a battery of sensitivity tests addressing, among others, concerns about pleiotropy and the maternal transmission of genes to her child.
Giorgia Menta, Anthony Lepinteur, Andrew E. Clark, Simone Ghislandi, Conchita D’Ambrosio


2019 - n° 136

Robots have radically changed the demand for skills and the role of workers in production at an unprecedented pace, with little scope for human capital adjustments. This has affected the job stability and the economic perspectives of large parts of the population in all industrialized countries. Recent evidence on the US labor market has shown negative effects of robots on employment and wages. In this study, we examine how exposure to robots and its consequences on job stability and economic uncertainty have affected individual demographic behavior. To establish this relationship, we use data from the American Community Survey and the International Federation of Robotics and we adopt an empirical strategy that relies on regional industry specialization before the advent of robots combined with the growth of robot adoption by industry. We first document the differential effect of robots on the labor market opportunities of men and women. We find that in regions that were more exposed to robots, the gender-income and labor-force-participation gaps declined. We then show that US regions affected by intense robot penetration experienced a decrease in new marriages, and an increase in both divorce and cohabitation. While there was no change in overall fertility rate, marital fertility declined, and there was an increase in out-of-wedlock births. Our findings are consistent with the hypothesis that the changes in labor markets triggered by robot adoption increased uncertainty, reduced the relative marriage-market value of men, and the willingness to commit for the long term.

Massimo Anelli, Osea Giuntella, Luca Stella
Keywords: Automation,marriage market,divorce,cohabitation,fertility,gender
2019 - n° 133
Does the gender of the mayor affect the size and composition of public expenditures and revenues? Do male and female mayors react differently to fiscal adjustments? Using a fuzzy regression discontinuity design in close mixed gender races for the election of mayors in Italian municipalities in the period 2000-2015, we find that female mayors collect more revenues and spend more than male ones, both in the current and capital account. When constrained to fiscal adjustments by the central government, in a fuzzy difference-in-discontinuities design we find that female mayors reduce expenditures more than men.
Alessandra Casarico, Salvatore Lattanzio, Paola Profeta
Keywords: Gender,Municipal government,Fiscal adjustment
2019 - n° 129
In this paper we set up a simple two-type optimal nonlinear income tax model where the single-crossing condition is violated, and we characterize the properties of a second-best optimum by considering the entire second-best Pareto frontier. The violation of single-crossing is generated by the assumption that agents dier both in terms of market abilities and in terms of their needs for a work-related good. Our analysis highlights several non-standard features of a second-best optimum. In particular, we show that a nonlinear income tax may allow the government to convert a pooling laissez-faire equilibrium into a separating equilibrium, that the second-best Pareto frontier may be discontinuous, and that a second-best optimum may not preserve the income ranking prevailing under laissez-faire. Finally, we also show that at a second-best optimum the labor supply of some agents might be distorted even though no self-selection constraint is (locally) binding in equilibrium.
Spencer Bastani, Soren Blomquisty, Luca Michelettoz
Keywords: Optimal nonlinear income taxation; single-crossing condition; multidi-mensional heterogeneity; redistribution.


2018 - n° 124
The stock market influences some of the most fundamental economic decisions of investors, such as consumption, saving, and labor supply, through the financial wealth channel. This paper provides evidence that daily fluctuations in the stock market have important–and hitherto neglected–spillover effects in another, unrelated domain, namely driving. Using the universe of fatal road car accidents in the United States from 1990 to 2015, we find that a one standard deviation reduction in daily stock market returns is associated with a 0.5% increase in the number of fatal accidents. A battery of falsification tests support a causal interpretation of this finding. Our results are consistent with immediate emotions stirred by a negative stock market performance influencing the number of fatal accidents, in particular among inexperienced investors, thus highlighting the broader economic and social consequences of stock market fluctuations.
Corrado Giulietti, Mirco Tonin, Michael Vlassopoulos.
Keywords: stock market,car accidents,emotions.
2018 - n° 123
How does pay-for-performance (P4P) impact productivity, multitasking, and the composition of workers in mission-oriented jobs? These are central issues in sectors like education or healthcare. We conduct a laboratory experiment, manipulating compensation and mission, to answer these questions. We find that P4P has positive effects on productivity on the incentivized dimension of effort and negative effects on the non-incentivized dimension for workers in non-mission-oriented treatments. In mission-oriented treatments, P4P generates minimal change on either dimension. Participants in the non-mission sector – but not in the mission-oriented treatments – sort on ability, with lower ability workers opting out of the P4P scheme.
Daniel Jones, Mirco Tonin, Michael Vlassopoulos.
Keywords: Prosocial motivation,Performance pay,Multitasking,Sorting
2018 - n° 122
Public procurement outcomes depend on the ability of the procuring agency to select well-performing suppliers. Should public administrations be granted more or less discretion in their decision making? Using Italian data on municipal public works tendered in the period 2009-2013, we study how a reform extending the scope of bureaucrat discretion affects supplier selection. We find that the share of contracts awarded to politically connected firms increases while the (ex-ante) labor productivity of the winning firm decreases, thus suggesting a potential misallocation of the public funds. These effects are concentrated among lower quality procuring agencies.
Audinga Baltrunaite, Cristina Giorgiantonio, Sauro Mocetti and Tommaso Orlando.
Keywords: discretion,supplier selection,public procurement,transparency,corruption.
2018 - n° 118
According to the existing theoretical literature, there are several channels through which privatization of State-owned enterprises and assets may shape the distribution of income, either increasing or decreasing the level of inequality. Assessing the actual distributional impact of privatization becomes therefore an empirical matter. This paper is a first attempt to empirically investigate the relationship between privatization and income inequality through redistribution, focusing on the role of democratic institutions in developing countries. Using an unbalanced panel of low and middle-countries in the period 1988-2008, we find that an increase in privatization revenue is negatively and significantly correlated with net-income inequality when democratic institutions are well consolidated. All the robustness checks we perform confirm this finding. Thus, our analysis seems to suggest that, in developing countries, policy makers’s choice of implementing divestiture programs while democratizing at the same time may lead to an improvement in income equality.
Lidia Ceriani, Simona Scabrosetti, Francesco Scervini.
Keywords: Inequality,Democracy,Privatization,Developing countries


2017 - n° 107
This paper integrates efficiency wage setting in the theory of optimal redistributive income taxation. In doing so, we use a model with two skill-types, where efficiency wage setting characterizes the labor market faced by the low-skilled, whereas the high-skilled face a conventional, competitive labor market. There are two types of jobs in this economy; a low-demanding job which can be carried out by everybody, and a high-demanding job which can only be carried out by the high-skilled, meaning that a potential mimicker may either adopt a conventional income-replication strategy or a job-replication strategy. In this framework, we show that the marginal income tax implemented for the high-skilled is negative under plausible assumptions. The marginal income tax facing the low-skilled can be either positive or negative in general, even if employment-related motives for policy intervention typically contribute to an increase in this marginal tax. An increase in the unemployment benefit contributes to relax the binding self-selection constraint (irrespective of the strategy adopted by a potential mimicker), which makes this instrument particularly useful from the perspective of redistribution.
Thomas Aronsson, Luca Micheletto.
Keywords: Nonlinear income taxation,unemployment benefits,efficiency wages,redistribution.
2017 - n° 100
This paper studies whether firms trade political contributions for public procurement contracts. Combining data on Lithuanian government tenders, corporate donors and firm characteristics, I examine how a ban on corporate contributions affects the awarding of procurement contracts to companies that donated in the past. Consistent with political favoritism, donors’ probability of winning falls by five percentage points as compared to that of non-donor firms after the ban. Evidence on bidding and victory margins suggests that corporate donors may receive auction-relevant information affecting procurement outcomes in their favor. I assess that tax payers save almost one percent of GDP thanks to the reform.
Audinga Baltrunaite
Keywords: political contributions,public procurement,contributing firms,rent-,seeking


2016 - n° 96
This paper provides a detailed empirical assessment of the evolution of income inequality and the redistributive e↵ects of the tax and transfer system following the 2007-2008 crisis. It focuses on the US case, drawing on data from the Current Population Survey for the period 2007-2012. Contrary to most existing studies, it uses of a wide range of inequality indicators and looks in detail at several sections of the income distribution, allowing for a clearer picture of the heterogeneous consequences of the crisis. Furthermore, it analyses the contribution of di↵erent types of taxes and transfers, beyond the overall cushioning e↵ect of the system, which allows for a more refined assessment of its e↵ectiveness. Results show that although the crisis implied income losses across the whole income distribution, the burden was disproportionately born by low to middle income groups. Income losses experienced by richer households were relatively modest and transitory, while those experienced by poorer households were not only strong but also highly persistent. The redistributive system had a crucial role in taming the increase in income inequality in the immediate aftermath of the crisis, and during the GR years, particularly cash transfers. After 2010, however, its e↵ect became weaker and income inequality experienced a new surge. The findings of this paper contribute to a better understanding of the distributional consequences of aggregate crises and the role of tax and transfer policies in stabilising the income distribution in a crisis aftermath.e theoretical bases for the impact of higher education policy on social mobility.
Vanda Almeida
Keywords: Crisis,Gini,Income,Inequality,Income tax,Low income,Personal Income Distribution,Redistribution,Safety net,Transfers
2016 - n° 95
This paper relates social mobility and social stratification to higher education policy. We show that higher‐education policy which leads to differences in quality and per‐student expenditure as well as in admission procedures between standard and elite universities, is a key factor in generating permanent social stratification and social immobility. We develop an intergenerational model which shows that a two‐tier higher education characterised by a division between elite and standard universities can be a key factor in generating permanent social stratification, social immobility and self‐reproduction of the ‘elite’. In our approach, low mobility is essentially explained by the differences in quality and in selection between elite and standard universities. A key result is that the wider the quality gap and the difference in per‐student expenditures between elite and standard universities, the less social mobility. This is because a larger quality gap reinforces the weight of family backgrounds at the expense of personal ability. Our simulations show that this impact can be large. These findings provide theoretical bases for the impact of higher education policy on social mobility.
Elisa S. Brezis, Joel Hellier
Keywords: Elite,Higher Education,Intergenerational mobility,Social stratification
2016 - n° 90
In this paper, we exploit pension reform-induced changes in retirement eligibility requirements to assess the role of grandparental child care availability in the employment of women who have children under 15. We focus on Italy for two reasons: first, it has low rates of female employment and little formal child care provision, and second, it has undergone several pension reforms in a relatively short time span. Our analysis shows that, among the women studied, those whose own mothers are retirement eligible have a 13 percent higher probability of being employed than those whose mothers are ineligible. The pension eligibility of maternal grandfathers and paternal grandparents, however, has no significant effect on the women’s employment probability. We also demonstrate that the eligibility of maternal grandmothers mainly captures the effect of their availability for child care. Hence, pension reforms, by potentially robbing households of an important source of flexible, low-cost child care, could have unintended negative consequences for the employment rates of women with children.
Massimiliano Bratti, Tommaso Frattini, Francesco Scervini
Keywords: grandparental child care,maternal employment,pension reform,retirement
2016 - n° 88
We study a setting where anti-discrimination legislation gives rise to adverse selection in the labor market. Firms rely on nonlinear compensation contracts to screen workers who differ in their family/career orientation. This results in a la- bor market equilibrium where career-oriented workers are offered an inefficiently low duration of parental leave. In addition, family-oriented workers are offered lower wages as compared to their equally skilled career-oriented counterparts. We demonstrate the usefulness of mandatory parental leave rules in mitigating the distortion in the labor market and derive conditions under which a Pareto im- provement is possible. We also characterize the optimal parental leave policy and highlight the possibility for parental leave legislation to eliminate the wage penalty of family-oriented workers by supporting pooling employment contracts.
Spencer Bastani, Tomer Blumkin, Luca Micheletto
Keywords: anti-discrimination,adverse selection,parental leave,efficiency
2016 - n° 85
How do tax incentives affect firms’ investment? Using confidential UK corporation tax returns, we provide new evidence on the effects of incentives in the form of depreciation allowances. We exploit a 2004 exogenous change in the qualifying thresholds for the first-year depreciation allowances (FYAs) and conduct a difference-in-difference analysis. Results suggest that the investment rate increased between 2.1 and 2.6 percentage points when firms became qualified for FYAs, relative to firms that never qualified. This implies an increase in investment rate of 11 percent at the mean. We exploit exogenous variation in the timing of tax payments to show that this large effect is not due to an increase in available cash and hence, this is primarily a cost of capital effect. Firms respond rather quickly to FYAs, within 12 to 18 months. Firms also bunch just below notches in the cost of capital created by the qualifying thresholds, suggesting salience of the FYAs. Such behaviour does not drive our main results.
Giorgia Maffini, Jing Xing, Michael P. Devereux
Keywords: investment,corporate tax,depreciation allowances,SMEs


2015 - n° 81
In the last few years, the UK has adopted a fiercely competitive business tax policy by reducing the general tax burden on business and expanding individual regimes targeted to mobile factors: CFC rules, interest deductibility rules, and the Patent Box have made the UK very attractive for internationally mobile capital and profits. As the same time, the UK has strongly supported the OECD BEPS project aimed at reducing multinationals’ tax avoidance and, hence, we argue, at eliminating or constraining forms of tax competition among countries based on individual regimes targeted to mobile capital and profits. We claim that, especially in the implementation phase of the BEPS recommendations, there will be tensions between the UK competitiveness agenda and its support for the BEPS. Such tensions will be reconciled by shifting the UK tax competition policy from a mix of rate-based plus individual regimes policy to more of a rate-based approach. In this scenario, the government will have to tighten some specific measures aimed at attracting highly mobile capital and profits, such as the patent box regime and possibly interest deductions. At the same time, it will reduce the tax burden on both mobile and less mobile activities by implementing economy-wide cuts, allowed under BEPS. Most likely, such cuts would come from a further reduction in the headline corporate tax rate and the cuts announced in the July 2015 Budget should be interpreted in this light. Cuts in the headline rate essentially reduce the taxation on profits but they do not take account of the fact that for other decisions such as investment in tangible assets and information and communications technology, other elements of the tax code, such as capital allowances, are more important. To foster real investment, the government could consider an increase in capital allowances. Another option would be the introduction of an Allowance for Corporate Equity (ACE). The interesting feature of the ACE in the context of BEPS is that it reduces the incentive to classify financing instruments as tax-advantaged debt.
Richard Collier, Giorgia Maffini
Keywords: Corporate income tax; BEPS; tax avoidance; international taxation,UK
2015 - n° 80
Discrimination in access to public services can act as a major obstacle towards addressing racial inequality. We examine whether racial discrimination exists in access to a wide spectrum of public services in the US. We carry out an email correspondence study in which we pose simple queries to more than 19,000 local public service providers. We find that emails are less likely to receive a response if signed by a black-sounding name compared to a white-sounding name. Given a response rate of 72% for white senders, emails from putatively black senders are almost 4 percentage points less likely to receive an answer. We also find that responses to queries coming from black names are less likely to have a cordial tone. Further tests suggest that the differential in the likelihood of answering is due to animus towards blacks rather than inferring socioeconomic status from race.
Corrado Giulietti, Mirco Tonin, Michael Vlassopoulos
Keywords: discrimination,public services provision,school districts,libraries,sheriffs,field experiment,correspondence study
2015 - n° 77
ABSTRACT In this paper we allude to a novel role played by the non-linear income tax system in the presence of adverse selection in the labor market due to asymmetric information between workers and firms. We show that an appropriate choice of the tax schedule enables the government to affect the wage distribution by controlling the transmission of information in the labor market. This represents an additional channel through which the government can foster the pursuit of its redistributive goals.
Spencer Bastani, Tomer Blumkin, Luca Micheletto
Keywords: adverse selection,labor market,optimal taxation,pooling,redistribution
2015 - n° 76
ABSTRACT This paper examines how companies’ capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies␣ marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives
Michael P. Devereux, Giorgia Maffini, Jing Xing
Keywords: corporate taxation,capital structure,tax returns
2015 - n° 74
ABSTRACT This paper reassesses the relationship between tax structure and long run income, using as indicators of tax structure both a new series of implicit tax rates based on Mendoza et al. (1997) and tax ratios, adopting a dynamic panel estimation strategy, and explicitly accounting for cross-section dependence in the panel. When implicit tax rates are used, the paper shows, the link between tax structure and long run income per capita is not robust to the adoption of different assumptions on observable and unobservable heterogeneity across countries. When tax ratios are used, there is some evidence of a negative impact of labour taxation on long run income, but this result is shown to capture non-fiscal effects coming from the evolution of the labour share. Turning to the short run, the research presented here finds strong evidence of a positive effect on per capita income of a tax shift from labour and capital taxation towards consumption taxation, which provides support for fiscal devaluations.
Giampaolo Arachi, Valeria Bucci, Alessandra Casarico
Keywords: long run income,tax structure,fiscal devaluation,cross-section dependence