Optimal Tax Mix with Income Tax Non-compliance (with Jason Huang) Journal of Public Economics (December 2016).
Although developing countries face high levels of income inequality, they rely more on consumption taxes, which tend to be linear and are less effective for redistribution than a non-linear income tax. One explanation for this pattern is that the consumption taxes are generally more enforceable in these economies. This paper studies the optimal combination of a linear consumption tax with a non-linear income tax for redistributive purposes. In our model, households might not comply with the income tax code by reporting income levels that differ from their true income. However, the consumption tax is fully enforceable. We derive a formula for the optimal income tax schedule as a function of the consumption tax rate, the recoverable elasticities, and the moments of the taxable income distribution. Our equation differs from those of Mirrlees (1971) and Saez (2001) because households face a consumption tax and they respond to income tax not only through labor supply but also through mis-reporting their incomes. Both aspects are empirically relevant to our calibration of the optimal top rate in the Russian economy. We then characterize the optimal mix between a linear consumption tax rate and a non-linear income tax schedule. Finally, we find that the optimal consumption tax rate is non-increasing in the redistributive motives of the social planner.
Political Dynasties and the Quality of Government (with Arthur Bragança and Claudio Ferraz) This paper examines whether dynastic politicians -- politicians that had relatives in office in the past-- affect the quality of government. We use a regression discontinuity design with electoral data for mayors in Brazil and examine whether dynastic politicians implement different policies compared to non-dynastic politicians. We find that dynastic politicians spend more resources, specially in investment in urban infrastructure, health and sanitation. However, we do not find improvements in economic growth and changes in the quality of public services.