I study optimal taxation of robots and labor income in a model in which robots substitute for routine work and complement non-routine work. The model features intensive-margin labor supply, endogenous wages, and occupational choice. I show that it is optimal to distort firms’ use of robots, thereby violating production efficiency. However, it is not obvious whether robots should be taxed or subsidized. The optimal policy exploits general equilibrium effects to compress the wage distribution which relaxes incentive constraints and raises welfare. If robots polarize the wage distribution, a tax on robots compresses wages at the top but raises inequality at the bottom. The sign of the robot tax depends on which of the two effects dominate. In addition, occupational choice partly offsets wage compression, thereby limiting the effectiveness of a robot tax. I use the model for quantitative analysis based on US data. In the short-run, in which occupations are fixed, the optimal robot tax is positive and sizable, but its welfare impact is negligible. In the medium-run, with occupational choice, the optimal robot tax and its welfare impact are diminished further – and approach zero as the price of robots continues to fall.
How should redistributive governments change tax and education policy in response to skill-biased technical change? To answer this question, this paper merges the canonical model of skill-biased technical change due to Katz and Murphy (1992) with the continuous-type Mirrlees (1971) model. Workers of different ability face an extensive education choice to become high-skilled. Wages are endogenous. Although we allow tax schedules to be conditioned on education, optimal marginal tax rates are independent of whether individuals are low-skilled or high-skilled. Only the intercepts of the optimal tax functions differ between low-skilled and high-skilled workers. Optimal marginal income tax rates follow the same formula as in Mirrlees (1971). We show that education should optimally be taxed on a net basis. Moreover, optimal tax and education policies do not exploit general-equilibrium effects on the wage distribution to reduce pre-tax earnings differentials. Skill-biased technical change raises optimal marginal income tax rates, especially in the middle of the earnings distribution. SBTC has ambiguous effects on net taxes on education as both distributional benefits and distortions simultaneously increase. Numerical simulations demonstrate that, strikingly, optimal income taxes and education subsidies hardly change in response to SBTC. SBTC raises marginal taxes for middle-income groups while net taxes on education may either decrease or increase.
We study the effect of skill-biased technological change (SBTC) on optimal linear income taxation and education subsidies in a model with heterogeneous individuals who – on the extensive margin – decide whether or not to attend college, and who supply labor on the intensive margin. If rising tuition fees are taken into account, SBTC increases the college wage premium and raises the share of college graduates. Optimal income taxes trade off distributional benefits against tax distortions on both, labor supply and the education decision. The distortions on the education decision are partly offset by the optimal college subsidy, which in addition helps redistribution by depressing the college wage premium. The effects of SBTC on optimal policy are analytically ambiguous. Using simulation, we find that optimal transfers increase in response to SBTC, making the tax system more progressive. However, the optimal tax and subsidy rate hardly change. Still, setting tax and subsidy rate non-optimally can lead to large welfare losses.
Using matched employer-employee data for the Netherlands, this paper studies the proximate causes of increasing wage inequality associated with globalization and skill-biased technical change: it investigates the extent to which changes in the employment share of exporters and the exporter premium, as well as changes in the share of college graduates and the college premium have contributed to rising wage inequality in the Dutch manufacturing sector between 2001 and 2005. Decomposition techniques are used to attribute changes in the wage distribution to three components: changes in returns to characteristics, composition changes, and changes in the distribution of residuals. The main findings are as follows: first, the exporter premium changed only slightly between 2001 and 2005, thus contributing little to rising inequality; second, an increasing exporter-employment share modestly decreased overall wage dispersion; third, a rising college premium contributed between 8% and 16% to inequality growth; fourth, the contribution of a rising share of college graduates to inequality explains more than 30% of the increase in dispersion. It is concluded that if globalization contributed to wage inequality, it did so via the skill- rather than the exporter premium.