The impact of real-world tax policy on households' lifecycle decisions

Description

Households frequently make decisions that policymakers must account for when designing economic systems. In this seminar, we'll have a look at optimal labor-leisure and savings decisions over the household's lifecycle, given a realistic model of taxes and social benefits. How much will they work and consume and at which ages, optimally? These questions are important to answer in order to

• analyze incentives set by current taxes and social benefits,
• judge the fairness of current transfer systems,
• discuss potential policy reforms.

However, solving the individual's optimization problem is challenging because of discontinuities and nonconvexities implied by real-world tax systems. Therefore, solution methods rely on heuristic optimization approaches, as recently proposed in a working paper of Prof. Brumm and co-authors. Optimal decisions typically feature intriguing behavior such as 'bunching' at the top of tax brackets.

Based on existing (Python) code, you will be asked to implement one of several extensions such as modeling countries other than the US, adding new governmental transfers, etc. Moreover, you will compare scenarios and discuss individual optimal behavior. You will report your results in a short thesis and present and discuss them in a final presentation.

Topics

Topics will be assigned during the kick-off meeting according to your individual preferences. Potential topics include

• Bürgergeld: The reformed social benefits for low income household has recently been critisized for discouraging households from working. How strongly does this effect materialize in a realistic model?
• Ehegattensplitting: Jointly filing married couples implies different work incentives on the higher earner and the lower earner. How do these incentives translate to household decisions?
• Retirement payments depend on prior earnings and the timing of retirement. New policies try to incentivice working at older ages. How to achieve this best?
• Tax system in Austria: Austria's tax system features profound non-convexities. How do individuals optimally react to these and how does the algorithm perform on that challenging system?
• Tax system in Italy: Italy's tax systems feature large spikes. How do individuals optimally react to these and how does the algorithm perform on that challenging system?

Dates

• Kick-off meeting: 24.10.2024, 15:45 - 17:15.
• Intermediate feedback session: individual appointment with your supervisor, mid november - mid december.
• Submission of seminar thesis: 15.01.2025.
• Final presentation: 23./24.01.2025.

This seminar will be held in-class.

Prerequisites

Interest in macroeconomics, optimization, and programming. Recommended: Successful participation in 'Economics II: Macroeconomics', 'Introduction to Operations Research I and II', and 'Introduction to Programming with Java', or equivalent courses.

Knowledge of Python is not required if you are familiar with at least one other programming language and are eager to equip yourself with the necessary foundations of Python.

Literature

Brumm, Johannes, and Laurence Kotlikoff and Christopher Krause: 'Global Life-Cycle Optimizer – Analyzing Fiscal Policy’s Potential to Dramatically Distort Labor Supply and Saving', Working Paper.