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We grateful to Nigel Chalk, Stephan Danninger, Vitor Gaspar, Gian Maria Milesi-Ferretti, and Marialuz Moreno Badia for their valuable comments, as well as Andrew Berg and Catherine Pattillo for supporting a broad macro-inequality research agenda, from which this paper ultimately derived. All remaining errors are ours.
Mertens (2015) documented that a top marginal rate cut for the top 1% implies a short run taxable income elasticity for the top 1% around 1.5, a rise in real GDP, a lower aggregate unemployment and positive effect on incomes outside of the top 1%.
The 15 commodity groups include: (1) Agriculture, forestry, fishing, and hunting. (2) Mining (3) Utilities; (4) Construction (5) Manufacturing (6) Wholesale trade (7) Retail trade (8) Transportation and warehousing; (9) information (10) Finance, insurance, real estate, rental, and leasing (11) Professional and business services; (12) Educational services, health care, and social assistance; (13) Arts, entertainment, recreation, accommodation, and food services (14) Other services (except government) and (15) Government.
The label “after redefinitions” implies that secondary products and their associated inputs have been reassigned to the industry in which they are the primary products. Redefinitions are made when the input structure of the industry’s secondary product differs significantly from the input structure of its primary product. For example, the restaurant services in hotels are redefined from the accommodations industry to the food services industry.
In line with the 2015 Use table, the industry-by-commodity domestic requirement matrix is also evaluated at 2015 producer prices and after redefinitions.
Roughly 20% of intermediate inputs used in the production of primary and manufactured goods come from services.
Our results would be qualitatively the same if production of low skill services used capital, as long as this sector is the least capital intensive; quantitatively, the results would not be too different from what we report here, as in the data this sector uses very little capital.
For example, Conesa and Kruger (2006) present a model were heterogeneity is the result of differences in abilities and age plus transitory shocks to labor productivity.
This assumption is made to isolate the distributional and macro impact of tax changes only, and abstract the potential effects coming from the government spending side (and its composition).
In the United States all forms of income are taxed; hence, the tax cut affects labor and capital income (interest earnings). The model abstracts from capital gains and dividend payments to keep the analysis simple (models that correctly account for trends in asset prices and dividend payments are extremely complicated) although these forms of income have their own tax schedules. If the tax cut also lowered divided or capital gain taxes our results would be lower bounds on the impact of such tax cuts.
The elasticity of labor supply for the higher earners is calibrated at 0.3 which is in line with the empirical literature.