| There is a total of two essays. The first essay is concerned with the general equilibrium implications of tax reform. Recently, different proposals have been advanced in order to reformulate drastically the tax code in the U.S. One of such proposals, the so called flat tax put forward by Hall and Rabushka (1995), has received considerable attention. In a nutshell, the proposed reform comprises the substitution of the existent federal income and capital income taxes by a single tax rate applied to labor income above a given threshold, and all capital income after full investment deductibility. In this essay, I explore two central implications of a flat tax: on one hand, its impact on aggregate capital accumulation, labor supply and welfare, and on the other hand, the resulting distributional effects. I investigate such reform by modelling the progressive features of the actual tax code and the proposed reform in a general equilibrium--life cycle economy with heterogeneous agents. In this context, flat tax reforms in a revenue neutral sense are studied quantitatively. The main implications of this study are, (i) the elimination of the current taxation of capital income has a significant effect on capital formation, and consequently, the effects on wages and interest rates are of considerable magnitude; (ii) aggregate labor input (in efficiency units) increases with the tax reform in most of the cases studied and labor hours of agents at the top of the income distribution substantially increase, but average labor hours slightly decrease; (iii) in all circumstances, the distributions of income, earnings, and particularly wealth, become more concentrated; (iv) despite large aggregate welfare gains (2.7% to 1.3% of individual consumption), in some situations there are households that do not benefit in utility terms with the tax reform.; The second essay deals with one of the stylized facts in the literature on savings. Among the oldest reported facts about savings behavior in cross section data, is that the fraction of income saved by households is increasing in household income. Furthermore, the differences in saving rates can be of considerable magnitude. For instance, the data compiled in Kuznets (1953) and Projector (1968), showed that households with incomes below one half of the mean income generally dissave, whereas households with incomes at or above two times the mean income save about twenty percent of their income. Given this, this essay is centered around two questions: What are the economic forces that contribute to explain this observation? Can calibrated general equilibrium model economies display stationary equilibrium saving rates that are increasing in household income? In answering the first of the posed questions, it is shown that the key forces behind the savings observations are the age structure of households (demographics), large permanent differences in labor earnings, and a social security system with similar attributes to the one that actually prevails in the U.S. It is also found, surprisingly, that temporary earnings shocks are not essential in generating the cross sectional saving facts. In terms of the second question, it is quantitatively demonstrated that life cycle economies with heterogeneous agents are successful in reproducing the saving observations. Moreover, simple life cycle models that do not account for agent heterogeneity, cannot generate the wide array of saving rates at different income levels that is displayed in U.S. cross section data. (Abstract shortened by UMI.)... |
