On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model - PowerPoint PPT Presentation

1 / 21
About This Presentation
Title:

On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model

Description:

Builds on a model presented in Meltzer and Richard (1981) in which there is ... In particular in this model: ... Model ... – PowerPoint PPT presentation

Number of Views:136
Avg rating:3.0/5.0
Slides: 22
Provided by: econ6
Category:

less

Transcript and Presenter's Notes

Title: On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model


1
On the Size of U.S. Government Political Economy
in the Neoclassical Growth Model
  • By Per Krusell and José-Víctor Ríos-Rull
  • Presented by Matthew Johnson
  • April 20, 2006

2
Motivation
  • In OECD countries, marginal tax rates on capital
    income vary between -90 and 49.5
  • Average labor income tax varies between 24 and
    63
  • Total tax burden varies between 26 and 54 of GNP
  • What can explain such variation in tax policies?

3
Motivation
  • Their goal is to build a general equilibrium
    political economy model which can be used to
    explain the tax rate and government size observed
    in US data
  • Builds on a model presented in Meltzer and
    Richard (1981) in which there is heterogeneity in
    labor income and the median voter has less than
    average labor productivity
  • Their model includes heterogeneity in both assets
    and labor income

4
Preview of Results
  • When the authors calibrate their model to US
    asset and income distribution data, they are able
    to match the transfer/GDP ratio within a few
    percentage points

5
Model
  • The model is a specific application of the one
    presented by Juan. In particular in this model
  • The aggregation mechanism is that the median
    voter will decide on the tax policy
  • The policy being voted on is a common marginal
    tax rate for labor and asset income
  • There is no capital externality in the production
    function

6
Model
  • Consumers face the following maximization problem

7
Model
  • The government budget constraint is
  • The aggregate resource constraint is
  • The rental and wage rates are given by

8
Model
  • The resulting Euler equations are
  • This gives I1 equations and 2I unknowns (ai,li)
    for all i
  • The utility function is chosen to be

9
Model
  • Given the utility function chosen and the set-up
    of the model all equilibrium aggregate capital
    stocks and aggregate labor inputs can be
    supported by any relative wealth and income
    distributions.

10
Political Equilibrium
  • Same as model presented by Juan
  • Solve jointly for a policy function ? and a law
    of motion for assets H such that
  • Same solution method Consider one period
    deviations from equilibrium policy functions
  • Median voter decides tax policy

11
Example
12
Quantitative Analysis
  • The rest of the paper will take as given wealth
    and income distribution in US, assume it is a
    steady state, and ask what tax rate supports it
    and what is the resulting size of government
  • Questionable assumptions
  • Households in data need to be treated as
    dynasties to fit into model
  • The budget is always balanced
  • Transfers are lump-sum and equal for all
    households
  • Marginal tax rates on labor and capital are equal

13
Calibration
  • Uses 1992 Survey of Consumer Finances to
    calibrate income and wealth distributions
  • Assumes three types of agents, whose fractions of
    the population are 49,2, and 49
  • Sort agents according to wealth, which gives the
    average wealth for each group. Then calculate
    the average income for each group given this
    sorting. Also consider reverse, first sort by
    earnings the calculate wealth
  • To account for differences in life-cycle earnings
    and income, mainly consider middle-aged
    households with ages between 41 and 65

14
Wealth and Earnings Distribution
15
Calibration
  • Imposes 5 restrictions on aggregates to calibrate
    parameters ß,s,a,?,d
  • Also need to calculate g. Break-up transfers
    into lump-sum taxes (T1) that go to all
    households income security transfers (T2) which
    go to needy households.
  • Estimate total govt revenues 29.7 of GDP, T1
    6.8 of GDP T2 2.7 of GDP
  • g T1 T2 29.7 ? g19.1

16
Calibration
17
Results
  • First considers static model, then move to
    dynamic model
  • Also reports results when utility function is
  • Baseline specification has ?0, but vary ? to see
    impact of changes in elasticity of substitution
    between consumption and leisure

18
Results
19
Results
20
Robustness Checks
  • The authors vary a number of parameters in the
    dynamic model, do not find large differences in
    results
  • Similar to variation in parameters for static
    model, changes in ? produced largest results

21
Conclusions/Extensions
  • The authors are able to build a dynamic political
    economy model that when calibrated to the wealth
    and earnings distributions in US data can produce
    reasonable tax and transfer rates
  • Tax rates same for everyone in this model, what
    if median voter could tax rich differently?
  • Would this model produce similar results if
    calibrated to the macroeconomic facts of other
    countries?
Write a Comment
User Comments (0)
About PowerShow.com