PhD thesis defence by Michael Barczay
This thesis studies the optimal design and the effects of fiscal policies, with a particular focus on taxation. It emphasises how such policies have heterogeneous effects across different socioeconomic groups and analyses how household heterogeneity shapes their optimal design.
In the first chapter, I study the optimal design of differentiated consumption taxes in the presence of progressive labor income taxes and capital income taxation. To this end, I develop a quantitative heterogeneous-agent model with non-homothetic preferences and uninsurable idiosyncratic risk. Using US consumption and regional price data, I estimate the model and show that it matches well the expenditure patterns across the income distribution. Solving the Ramsey problem in which the government jointly chooses labor income and consumption taxes, the optimal policy prescribes a subsidy on necessities of -52% and a positive tax of 7% on luxuries. These consumption taxes are optimally accompanied by a reduction in labor tax progressivity. I show that three factors contribute to this result. First, subsidised necessities provide consumption insurance. Second, the positive tax on luxuries acts as an implicit tax on existing wealth. Third, the differentiated rates strengthen labor supply incentives among highly productive households.
In the second chapter, my co-authors and I study the effects of mobile money taxes in Sub-Saharan Africa. Mobile money has become a central digital alternative to traditional banking in developing countries, yet several African governments have introduced taxes on mobile money transactions. We develop a model that characterises how such taxes affect payment choices and generate excess burden. The model predicts that taxation reduces mobile money use, with elasticities shaped by access to substitutes and transaction costs: banked users substitute into formal alternatives, while unbanked users face higher effective costs, making the tax regressive. Taxation also induces substitution into cash, raising informality. We empirically test these predictions using cross-country survey data and novel transaction-level data from Cameroon, the Central African Republic, and Mali. Results show sharp declines in mobile money usage, with stronger responses among the banked. Unbanked and rural users bear a disproportionate burden. We use the empirical estimates to gauge the excess burden of the tax, which we quantify at 35% of revenue—highlighting its significant efficiency cost alongside its regressive impact.
The final chapter starts from the observation that green policies aimed at mitigating climate change and pollution often face substantial popular opposition. In this paper, my co-author and I study this tension in the context of green investment tax credits (ITCs) by analysing their political economy in an overlapping generations model with heterogeneous households, multiple sectors, and a polluting technology. We show that such green ITCs improve long-run welfare by reducing pollution but generate short-run distributional conflicts: high- and low-income households differ in their immediate gains, while future generations benefit disproportionately. As a result, a fully tax-financed ITC may fail to obtain majority support at adoption, even though it is socially desirable in the long run. We show that partial debt financing resolves this tension. By spreading costs within and across generations, debt issuance raises approval rates. The debt can be fully repaid over time while preserving support for the ITC, as shifts in asset market participation and factor prices gradually realign incentives. These results highlight how intertemporal fiscal design can reconcile environmental effectiveness with political feasibility.
The event will take place in hybrid modality.
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