Essays on fiscal policy and the macroeconomy

Abstract

The three chapters of this thesis provide a theoretical and quantitative analysis of three elements of the tax-transfer system which recently received increased attention in both the academic and the public policy debate in the United States and Europe. In the first chapter, I show theoretically that optimal taxes on business owners are not entirely characterized by the usual, well established, equity-eficiency trade-off but that additional \trickle down" effects reduce optimal tax rates. As taxes on business income reduce investment, the demand for labor declines, which results in lower wages. I show quantitatively, on the basis of a dynamic general equilibrium model calibrated to US data, that these effects substantially reduce the optimal progressivity of the income tax code. In the second chapter, joint with Fabian Kindermann and Dominik Sachs, we argue that the taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. On the basis of a life-cycle model calibrated to the German economy we show that for each Euro of bequest tax revenue that the government mechanically generates, it can expect another 7.6 Cent through higher labor income taxes of heirs. We show theoretically and quantitatively that a proper modeling of - empirically hard to identify - anticipation effects is crucial to obtain this result. Finally, in the third chapter, joint with Arpad Abraham, Joao Brogueira de Sousa and Ramon Marimon, we assess the beneffts of a potential European Unemployment Insurance System using a multi-country dynamic general equilibrium model with search frictions. In spite of substantial heterogeneity of labor market institutions across Europe, we find that a harmonized benefft system with a low replacement rate but an unlimited duration of eligibility is welfare improving in all countries as long as country specific contribution payments eliminate persistent transfers.