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Macroeconomic and Distributional Effects of Personal Income Tax Reforms: A Heterogenous Agent Model Approach for the U.S

Author

Listed:
  • Mrs. Sandra V Lizarazo Ruiz
  • Mr. Adrian Peralta
  • Mr. Damien Puy
Abstract
This paper assesses the macroeconomic and distributional impact of personal income tax (PIT) reforms in the U.S. drawing on a multi-sector heterogenous agents model in which consumers have non-homothetic preferences and sectors differ in terms of their relative labor and skill intensity. The model is calibrated to key characteristics of the US economy. We find that (i) PIT cuts stimulate growth but the supply side effects are never large enough to offset the revenue loss from lower marginal tax rates; (ii) PIT cuts do “trickle-down” the income distribution: tax cuts stimulate demand for non-tradable services which raise the wages and employment prospects of low-skilled workers even if the tax cut is not directly incident on them; (iii) A revenue neutral tax plan that reduces PIT for middle-income groups, raises the consumption tax, and expands the Earned Income Tax Credit can have modestly positive effects on growth while reducing income polarization; (iv) The growth effects from lower income taxes are concentrated in non-tradable service sectors although the increased demand for tradable goods generate positive spillovers to other countries; (v) Tax cuts targeted to higher income groups have a stronger growth impact than tax cuts for middle income households but significantly worsen income polarization, even after taking into account trickle-down effects and an expansion of the Earned Income Tax Credit.

Suggested Citation

  • Mrs. Sandra V Lizarazo Ruiz & Mr. Adrian Peralta & Mr. Damien Puy, 2017. "Macroeconomic and Distributional Effects of Personal Income Tax Reforms: A Heterogenous Agent Model Approach for the U.S," IMF Working Papers 2017/192, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/192
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    Citations

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    Cited by:

    1. Boris Cournède & Jean-Marc Fournier & Peter Hoeller, 2018. "Public finance structure and inclusive growth," OECD Economic Policy Papers 25, OECD Publishing.
    2. D'ANDRIA Diego & DEBACKER Jason & EVANS Richard W. & PYCROFT Jonathan & ZACHLOD-JELEC Magdalena, 2021. "Taxing income or consumption: macroeconomic and distributional effects for Italy," JRC Working Papers on Taxation & Structural Reforms 2021-13, Joint Research Centre.
    3. Sergey A. Belozyorov & Olena V. Sokolovska, 2018. "Personal income taxation and income inequality in Asia-Pacific: a cross-country analysis," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 4(3), pages 236-249.
    4. Sokolovska, Olena, 2018. "Labor income taxation in open economies: current trends and options for reforms," MPRA Paper 86233, University Library of Munich, Germany.
    5. Ergül, Özgür & Göksel, Türkmen, 2020. "The effects of technological development on the labor share of national income," Economic Modelling, Elsevier, vol. 87(C), pages 158-171.
    6. Helen Van Eyk & Elizabeth Harris & Fran Baum & Toni Delany-Crowe & Angela Lawless & Colin MacDougall, 2017. "Health in All Policies in South Australia—Did It Promote and Enact an Equity Perspective?," IJERPH, MDPI, vol. 14(11), pages 1-25, October.
    7. Mr. Nigel A Chalk & Mr. Michael Keen & Ms. Victoria J Perry, 2018. "The Tax Cuts and Jobs Act: An Appraisal," IMF Working Papers 2018/185, International Monetary Fund.

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