Paweł Doligalski

We extend the theory of optimal redistributive taxation to economies with an informal sector. In particular, in our model workers can supply labor simultaneously to the formal and the informal sectors, which we call moonlighting. The optimal tax formula contains two novel terms capturing informality responses on an intensive and an extensive margin. Both terms decrease the optimal tax rates. We estimate the model with Colombian data and find that informality strongly reduces tax rates at all income levels. The possibility to migrate to entirely informal employment restricts tax rates at low and medium income levels, while the possibility of moonlighting is relevant at higher earnings.

We construct and estimate a business cycle model with search and matching frictions in the labor market and in the product market. We show that the dynamic structure of the model and the endogenous job separation rate are important to accurately represent the empirical responses to the technology and the demand shocks. Our main finding is that the demand shock explains at least 58% of the unemployment fluctuations in the US, while the technology shock accounts for the residual.

Half of the jobs in the U.S. feature pay-for-performance. We derive novel incidence and optimum formulas for the overall rate of tax progressivity and the top tax rates on total earnings and bonuses, when such labor contracts arise from moral hazard frictions within firms. Optimal taxes account for the fiscal externalities and welfare consequences of two distinct forces: a direct crowding-out of private insurance and a countervailing crowding-in due to endogenous labor effort responses. These imply that the amount of pre-tax earnings risk to which the worker is exposed is roughly invariant to tax progressivity, whereas the (adverse) welfare consequences of the crowd-out outweigh those of the crowd-in. Quantitatively, the optimal tax policy with performance-pay contracts is close to that prescribed by standard models that treat pre-tax earnings risk as exogenous. Finally, we uncover an efficiency-based argument for taxing bonuses at strictly lower rates than base earnings.

The optimal income taxation literature typically assumes that labor is traded on the spot markets. I relax this assumption by equipping workers and firms with a commitment power and, as a consequence, allowing for more sophisticated labor contracts. The main finding is that when both workers and firms have any positive commitment power, the tax schedule cannot be too regressive, as otherwise wages would be inefficiently randomized to reduce the expected tax paid by workers. I also show that the insurance of workers depends only on the total commitment power on the labor market, but not on its division between workers and firms. I calibrate the model to the US income distribution. The threat of wage randomization reduces the optimal marginal tax rates at low income levels by up to 40 percentage points and in certain cases makes the optimal tax schedule fully linear.

New Dynamic Public Finance describes the optimal income tax in the economy without private insurance opportunities. I extend this framework by introducing permanent employment contracts which facilitate insurance provision within firms. The optimal tax system becomes remarkably simple, as the government outsources most of the insurance provision to employers and focuses mainly on redistribution. When the government wants to redistribute to the poor, a dual labor market could be optimal. Less productive workers are hired on a fixed-term basis and are partially insured by the government, while the more productive ones enjoy the full insurance provided by the permanent employment. Such arrangement discourages the tax avoidance of the productive workers and hence allows the government to tax them more. I provide empirical evidence consistent with the theory and characterize the constrained efficient allocations for Italy.

When does paying a strictly positive compensation in every state of the world improve incentives to exert effort? I show that in the typical model of moral hazard it happens only when the effort is a strict complement to consumption. If the cost of effort is monetary, a positive minimal compensation strengthens incentives only when the agent is prudent and always does so when the marginal utility of consumption is unbounded at zero consumption. I suggest applications of these results in the personal income taxation.