André Sztutman

How are optimal taxes affected by reputation building and imperfect information in labor markets? In this paper, I build a model of labor markets with incomplete and asymmetric information where job histories play a crucial role in transmitting information about workers’ productivity, which allows us to better understand the efficiency and distributive consequences of imperfect monitoring and screening in labor markets, and the tradeoffs the government faces when setting taxes. Optimal taxes are described by generalized versions of standard redistributive and corrective taxation formulas, which depend crucially on labor wedges: the ratios of the marginal contribution to output over the increases in lifetime earnings that result from supplying one extra unit of labor at each period. Combining estimates from the literature and new estimates using data from the Health and Retirement Study, I find that, the corrective component of taxes is large, especially at the top of the income distribution.

How should income taxes account for heterogeneity in elasticities of taxable income? We address this question with a test that passes if and only if there exists a weighted utilitarian planner for whom taxes are locally optimal. Our test incorporates standard sufficient statistics and a novel ingredient: the variance of elasticities conditional on income. Theoretically, we show that the test fails when these variances are sufficiently high. Empirically, we find they are indeed large in a panel of US tax returns. We thereby conclude, without taking a stance on redistributive preferences, that there are welfare-improving tax reforms.