Bunching and Taxing Multidimensional Skills / Job Boerma, Aleh Tsyvinski, Alexander P. Zimin.

By:

Boerma, Job

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30015.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

Other classification:

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: We characterize optimal policies in a multidimensional nonlinear taxation model with bunching. We develop an empirically relevant model with cognitive and manual skills, firm heterogeneity, and labor market sorting. The analysis of optimal policy is based on two main results. We first derive an optimality condition − a general ABC formula − that states that the entire schedule of benefits of taxes second order stochastically dominates the entire schedule of tax distortions. Second, we use Legendre transforms to represent our problem as a linear program. This linearization allows us to solve the model quantitatively and to precisely characterize the regions and patterns of bunching. At an optimum, 9.8 percent of workers is bunched both locally and nonlocally. We introduce two notions of bunching - blunt bunching and targeted bunching. Blunt bunching constitutes 30 percent of all bunching, occurs at the lowest regions of cognitive and manual skills, and lumps the allocations of these workers resulting in a significant distortion. Targeted bunching constitutes 70 percent of all bunching and recognizes the workers' comparative advantage. The planner separates workers on their dominant skill and bunches them on their weaker skill, thus mitigating distortions along the dominant skill dimension. Tax wedges are particularly high for low skilled workers who are bluntly bunched and are also high along the dimension of comparative disadvantage for somewhat more skilled workers who are targetedly bunched.

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30015 (Browse shelf(Opens below))	Not for loan

Total holds: 0

May 2022.

We characterize optimal policies in a multidimensional nonlinear taxation model with bunching. We develop an empirically relevant model with cognitive and manual skills, firm heterogeneity, and labor market sorting. The analysis of optimal policy is based on two main results. We first derive an optimality condition − a general ABC formula − that states that the entire schedule of benefits of taxes second order stochastically dominates the entire schedule of tax distortions. Second, we use Legendre transforms to represent our problem as a linear program. This linearization allows us to solve the model quantitatively and to precisely characterize the regions and patterns of bunching. At an optimum, 9.8 percent of workers is bunched both locally and nonlocally. We introduce two notions of bunching - blunt bunching and targeted bunching. Blunt bunching constitutes 30 percent of all bunching, occurs at the lowest regions of cognitive and manual skills, and lumps the allocations of these workers resulting in a significant distortion. Targeted bunching constitutes 70 percent of all bunching and recognizes the workers' comparative advantage. The planner separates workers on their dominant skill and bunches them on their weaker skill, thus mitigating distortions along the dominant skill dimension. Tax wedges are particularly high for low skilled workers who are bluntly bunched and are also high along the dimension of comparative disadvantage for somewhat more skilled workers who are targetedly bunched.