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Macro/International Economics Seminar - Raffaele Rossi (Manchester)

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Raffaele will be visiting the department for this Seminar - Roberto Pancrazi will be hosting this visit.

Title: Marginal Tax Rate Changes in the Long-Run: Evidence from a Structural Estimation, With Patrick Macnamara (U. of Manchester) and Myroslav Pidkuyko (Bank of Spain).

Abstract: Using a structural life-cycle model, we estimate the long-run behavioral response to marginal tax rate changes along the income distribution. We find statistically significant long-run tax elasticities of income of around 0.7 for all taxpayers. We also estimate that the richest top 1 percent displays the highest elasticities of taxable income. In our economy, agents who are sufficiently productive can obtain higher returns on their wealth by choosing to be entrepreneurs. Return heterogeneity, in combination with earning risk and tax progressivity, increases the incentives to save and invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This, in turn, strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.

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