Matthew Weinzierl

14 Results

 

Positive and Normative Judgments Implicit in US Tax Policy and the Costs of Unequal Growth and Recessions

What does United States tax policy reveal about Americans' values and beliefs, and about how those values and beliefs have changed over time? In this paper, the researchers use theory and data to back out the implicit priorities and judgments in US tax policy over the last several decades. They find a dramatic shift in the mid-1980s that persisted, and even continued, over the next 25 years and that cannot be reconciled with conventional assumptions about these values and beliefs. They explore evidence on a number of possible explanations for this shift, including a link between economic and political inequality. They also attempt to use their results to estimate the welfare costs of two key phenomena—rising inequality and recessions—and find that these estimates are highly sensitive to the explanation one adopts for the evolution of US policy. Overall, the researchers argue, uncovering the judgments implicit in policy provides a promising path toward both a better understanding of policy priorities and more objective comparisons for policy evaluation. Read More

Revisiting the Classical View of Benefit-Based Taxation

President Barack Obama explains his support for progressive taxes as based on the belief that "those who've benefited most from our way of life can afford to give back a little bit more." Called the classical version of benefit-based taxation, this reasoning has been used by policymakers and scholars for centuries, but it has been assigned at best a subsidiary role in modern research on optimal tax policy. In this paper, the author revisits that view and shows how it might be incorporated into modern theory. It turns out that this classical version of benefit-based taxation fits seamlessly into the modern (Mirrleesian) approach, with results for optimal policy that depend on potentially estimable statistics. Optimal policy according to this view can take a wide variety of forms, including those that match existing policy well. More generally, to the extent that a mixture of this classical benefit-based reasoning and the more conventional welfarist (e.g., utilitarian) reasoning is a good approximation of prevailing objectives for tax policy, the model may offer a useful approach to positive optimal tax theory. Read More

The Promise of Positive Optimal Taxation: A Generalized Theory Calibrated to Survey Evidence on Normative Preferences Explains Puzzling Features of Policy

The traditional goal of optimal tax research among economists has been to choose the "right" normative objective for policy and characterize the tax system that best attains it. However, public opinion on the appropriate normative criterion has been seen as beside the point. An alternative goal, pursued in this paper, is to characterize the tax system that best attains the normative objective that prevails in reality. Weinzierl makes three contributions. First, he presents novel survey evidence on the empirical normative preferences of individuals in the United States. The evidence shows that few respondents prefer the conventional Utilitarian policy or the Rawlsian alternative, and a plurality (nearly half) prefer policies that reflect a mixed objective that gives weight to both Utilitarianism and Equal Sacrifice. Second, he generalizes the conventional optimal tax model to accommodate evidence of a mixed objective for taxation. Third, he shows that the empirically-preferred calibration of the generalized theory has remarkable explanatory power as a positive optimal tax model. Taken together, the survey results, theoretical analysis, and calibrated simulations of this paper demonstrate the potential of a positive optimal taxation research agenda. They show that we can rigorously capture empirical evidence on what tax policies individuals find acceptable and, as one might hope, use the resulting model to better understand how actual tax policy is and (arguably) ought to be designed. Read More

Why Do We Tax?

As the US presidential election bears down for November, it's prime time to ask how the income tax system could be improved. Assistant Professor Matthew C. Weinzierl suggests how. Open for comment; 20 Comments posted.

Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children’s Abilities Depend on Parents’ Resources

Economists have long recognized that parents' resources and investment in their children may be key determinants of their children's outcomes. Recent evidence indicates that increasing the disposable incomes of poor parents raises the performance of their children on tests of cognitive ability. That finding suggests that current tax policy may affect the future distribution of underlying income-earning abilities in the taxpayer population. However, the dominant model of optimal taxation has been unable to take this effect into account. This study explores the implications for optimal policy of taking a more nuanced approach. Using a calibrated model to simulate optimal policy, the authors find that the optimal policy redistributes substantially more toward low-ability parents and earlier generations than does status quo policy. This paper may be the first to model this complexity and derive policy implications. Read More

Why Do We Redistribute So Much but Tag So Little? The Principle of Equal Sacrifice and Optimal Taxation

Why don't we tax personal characteristics such as height, race, and gender? The conventional optimal tax model suggests that we should, while no societies do. This paper proposes an explanation: conventional optimal tax theory has yet to capture the diversity of normative principles with which society evaluates taxes. Incorporating a role for the principle of equal sacrifice in how taxes are designed, a principle held by many leading thinkers to be the natural criterion of justice in taxation, substantially improves the match between the theory of optimal taxes and the reality of tax policy. This alternative reconciles three features of real-world policy that seemed incompatible in the standard model: limited taxation of personal characteristics not directly linked to ability, moderate marginal tax rates at high incomes, and substantial redistribution to the poor. Read More

De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution

Individuals differ in the value they place on consumption relative to leisure. These preference differences help explain why some earn more than others, and they are a central part of popular and scholarly debates over taxation. In this paper, Benjamin Lockwood and Matthew Weinzierl show that variation in these preferences may also help explain why the extent of redistribution varies across countries and US states, and why (at least in the case of the United States) redistribution is weaker than conventional theory would suggest. More generally, Lockwood and Weinzierl argue that neglecting the role of preferences substantially impairs our understanding of both optimal and existing tax policy. Overall, findings suggest that this paper's generalized normative optimal tax model may be a better guide to policy advice than the conventional one. Read More

HBS Faculty Views on Debt Crisis

In the midst of the US debt crisis, Harvard Business School faculty offer their views on what went wrong and what needs to be done to right the US ship of state. Open for comment; 27 Comments posted.

An Exploration of Optimal Stabilization Policy

The researchers explore alternative policy responses to a recession caused by a decline in aggregate demand, the situation affecting the global economy over the last several years. They show that policies that stimulate the economy at the lowest budgetary cost may not be the best policies in terms of well-being, as well-being depends not only on the level of activity but also on the composition of it (due to consumption, investment, and government spending). In their model of the economy, monetary policy is the best response, and if it is sufficient to stop the recession, government spending ought to move in the same direction as private spending. If monetary policy is insufficient or restricted, fiscal policy should try to replicate what monetary policy would do. If that option, too, is restricted, conventional policies that increase government spending are merited. Read More

The Surprising Power of Age-Dependent Taxes

Professor Matthew Weinzierl helps initiate a resurgence of interest in the idea of age-dependent taxes—that is, the idea of making the tax rate contingent upon the age of the tax payer. Using optimal tax theory as well as data from the US Panel Study of Income Dynamics, he shows how the administratively simple reform of age dependence can make the tax system substantially more efficient and more equitable. Read More

Preference Heterogeneity and Optimal Capital Income Taxation

Professor Matthew Weinzierl and coauthors test the idea that savings, which is concentrated among highly skilled workers, ought to be taxed as part of an optimal tax policy. They find that the welfare gains from these taxes would be negligible. Read More

The Height Tax, and Other New Ways to Think about Taxation

The notion of levying higher taxes on tall people—an idea offered largely tongue in cheek—presents an ideal way to highlight the shortcomings of current tax policy and how to make it better. Harvard Business School professor Matthew C. Weinzierl looks at modern trends in taxation. Read More

Optimal Taxation in Theory and Practice

Are developments in the theory of taxation improving tax policies around the world? The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. The authors find that there has been considerable change in the theory and practice of taxation over the past several decades—although the two paths have been far from parallel. Overall, tax policy has moved in the directions suggested by theory along a few dimensions, even though the recommendations of theory along these dimensions are not always definitive. Read More

The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution

A tax on height follows inexorably from a well-established empirical regularity and the standard approach to the optimal design of tax policy. Many readers of this paper, however, will not so quickly embrace the idea of levying higher taxes on tall taxpayers. Indeed, when first hearing the proposal, most people either recoil from it or are amused by it. That reaction is precisely what makes tax policy so intriguing, according to N. Gregory Mankiw of Harvard University and Matthew Weinzierl of HBS. This paper addresses a classic problem: the optimal redistribution of income. A Utilitarian social planner would like to transfer resources from high-ability individuals to low-ability individuals, but is constrained by the fact that he cannot directly observe ability. Taxing height helps the planner achieve redistribution efficiently because height, the data show, is an indicator of income-earning ability. Although readers might take this paper in one of two ways—some seeing it as a small, quirky contribution aimed to clarify the literature on optimal income taxation, others as a broader effort to challenge the entire literature—the authors' results raise a fundamental question about the framework for optimal taxation for which William Vickrey and James Mirrlees won the 1996 Nobel Prize in Economics and which remains a centerpiece of modern public finance. Read More