Sachs, Dominik

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Education Policies and Taxation without Commitment

2018-10-03, Findeisen, Sebastian, Sachs, Dominik

We study the implications of limited commitment on education and tax policies set by benevolent governments. Consistent with real‐world practices, a government can decide to subsidize different levels of education at different rates. A lack of commitment, however, affects the optimal structure of education subsidies. The direction of the effect depends on how labor taxes are designed. With linear labor tax rates and a transfer for redistribution, subsidies become more progressive. By contrast, if the government is only constrained by informational asymmetries when designing taxes, subsidies become more regressive.

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Redistribution and insurance with simple tax instruments

2017-02, Findeisen, Sebastian, Sachs, Dominik

We analyze optimal taxation of labor and capital income in a life cycle framework with idiosyncratic income risk and ex-ante heterogeneity. Tax instruments are simple in that they can only condition on current income. We provide a decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor income tax rates and provides a lower bound on optimal taxes. Optimal capital taxes are significant.

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Education and optimal dynamic taxation : The role of income-contingent student loans

2016-06, Findeisen, Sebastian, Sachs, Dominik

We study the optimal design of integrated education finance and tax systems. The distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry. Consistent with empirical evidence, this human capital investment decision is risky. We find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income-contingent repayment can always be designed in a Pareto optimal way. We present a simple empirically driven application of the framework to US data in which individuals make a college entry decision. We find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards. So although the full optimum could lead to complicated non-linear schedules in theory, very simple instruments can replicate it fairly well. The welfare gains from income-contingent repayment are significant.