Essays on Income Taxation and Wealth Inequality

This thesis is concerned with inequality, redistribution and taxation, in particular the taxation of labour income and the distribution of wealth. Most of the analysis is focused on Sweden. The thesis consists of four self-contained essays. Essay 1: “Analyzing tax reforms using the Swedish Labour Income Microsimulation Model”. Labour income taxation is a central policy topic because labour income makes up the majority of national income and most taxes are in the end taxes on labour. In order to quantify how behavioural responses of labour income earners affect tax revenue, the Swedish Labour Income Microsimulation Model (SLIMM) is constructed and used to evaluate tax reforms. Elasticities are calibrated to match midpoints of estimates found in the quasiexperimental literature. The simulations indicate that the earned income tax credit has increased employment by 128,000 and has a degree of self-financing of 21 percent. Almost half of the revenue increase from higher municipal tax rates would disappear due to behavioural responses. Tax cuts for the richest fifth of working Swedes are completely self-financing. Essay 2: “The Laffer curve for high incomes”. An expression for the Laffer curve for high incomes is derived, assuming a constant Pareto parameter and elasticity of taxable income. Microsimulations using Swedish population data show that the simulated curve matches the theoretically derived Laffer curve well, suggesting that the analytical expression is not too much of a simplification. A country-level dataset of top effective marginal tax rates and Pareto parameters is assembled. This is used to draw Laffer curves for 27 OECD countries. Revenue-maximizing tax rates and degrees of self-financing for a small tax cut are also computed. The results indicate that degrees of self-financing range between 28 and 195 percent. Five countries have higher tax rates than the peak of the Laffer curve. Essay 3: “Political preferences for redistribution in Sweden” (with Spencer Bastani). We examine preferences for redistribution inherent in Swedish tax policy 1971–2012 using the inverse optimal tax approach. The income distribution is carefully characterized with the help of administrative register data and we employ behavioral elasticities reflecting the perceived distortionary effects of taxation. The revealed social welfare weights are high for non-workers, small for low-income earners, and hump-shaped around the median. At the top, they are always negative, especially so during the high-tax years of the 1970s and ’80s. The weights on non-workers increased sharply in the 1970s, fell drastically in the late ’80s and early ’90s, and have since then increased. Essay 4: “Wealth inequality in Sweden: What can we learn from capitalized income data?” (with Daniel Waldenström). This paper presents new estimates of wealth inequality in Sweden during 2000–2012, linking wealth register data up to 2007 and individually capitalized wealth based on income and property tax registers for the period thereafter when a repeal of the wealth tax stopped the collection of individual wealth statistics. We find that wealth inequality increased after 2007 and that more unequal bank holdings and housing appear to be important drivers. We also evaluate the performance of the capitalization method by contrasting its estimates and their dispersion with observed stocks in register data up to 2007. The goodness-of-fit varies tremendously across assets and we conclude that although capitalized wealth estimates may well approximate overall inequality levels and trends, they are highly sensitive to assumptions and the quality of the underlying data sources