This dissertation is a collection of two essays relating to the dynamic effects of taxation. In the first chapter, I focus on a key challenge faced by tax reforms: their short-run welfare consequences. I examine a consumption-based tax reform that, despite the long-run welfare gains it generates, causes the welfare for some groups such as retirees or the working poor to fall during transition between steady states. Using a life-cycle model with heterogeneous households, I show how to devise a transition path from the current U.S. federal tax system to a consumption-based tax system that improves the welfare of current generations as well as those who are born in the long-run steady state. In a nutshell, all households alive at the time of the policy change can choose when they want to switch to the new tax system, or whether they want to switch at all. I find that implementing a tax reform with this feature improves the welfare of 95% of the population in the short run, compared to less than 25% of population in the conventional case with no choice. It takes about 20 years for half of the population to pay their taxes under the new tax code.In the second chapter, I study the aggregate consequences of the differential tax treatments of U.S. businesses focusing on the role of legal forms of organization. I develop an industry equilibrium model in which the organizational form is an endogenous choice.This model incorporates the key trade-off that businesses face when choosing their legal forms: the tax treatment of the business income; the access to external capital, and the potential level and evolution of productivity over time.The model is matched to the firm dynamic features of U.S. businesses and the contributing share of each legal form in total output. Using the model, I study revenue-neutral tax reforms in which legal forms receive the same tax treatments, and I find that the incentives induced by tax structure for organizational form and external finance are both large. Relative to the benchmark economy, unifying the tax code for all legal forms, can lead to 8% increase in the aggregate output.

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

"This dissertation considers two distinct issues in macroeconomics. The first and second chapters look at the effects of changes in tax policy on productivity of an economy from an empirical and theoretical stand point. The third chapter concerns the implications of cross-national migration for long-run growth and welfare. In the first chapter, I analyze the effects of tax policy changes on US total factor productivity (TFP). A substantial fraction of the income differences between countries can be explained by differences in TFP. Thus it is important to know the effects of policy changes on TFP. This is the first study that looks at the effect of changes in tax policy on TFP. Data on tax shocks comes from the sources used by Romer and Romer (2009). Empirical estimates show that a 1 percent permanent exogenous rise in total taxes lowers TFP by up to 1.75 percent in the long run. The drop in output associated with the increase in taxes is between 2 and 3 percent. Thus the change in TFP explains most of the movement in output that follows a tax change. Individual income taxes have a strong and significant effect on TFP whereas corporate income taxes do not significantly affect TFP or most other macroeconomic variables. The analysis also shows that the effects of tax changes on output and on observable inputs have become smaller over time while the effects on TFP and on wages have become larger over time. In the second chapter, I build a dynamic stochastic general equilibrium model to explain the dynamic macroeconomic effects of tax changes. The model has two key features: learning-by-doing at the worker level and endogenous TFP evolution whereby TFP growth depends on investment and human capital. When I calibrate the learning-by-doing and TFP evolution processes using micro evidence on the effect of human capital accumulation on productivity, the effect of taxes on TFP in the model is substantially less elastic than in the data. When I instead select parameters to match key aggregate moments, the estimated model is successful in accounting for the qualitative and quantitative nature of the empirical results. However, this requires stronger learning-by-doing than seems reasonable given the microeconomic evidence. I argue that the gap between the model and data may arise because some of the tax changes labeled as exogenous by Romer and Romer (2009) are in fact endogenous in which case the empirical results would overstate the true effects of tax changes on TFP. The difference between model and data may also arise because of the model not being rich enough. The model drives its components from both the business cycle and endogenous growth literature, thus the gap between model and data perhaps shows that the literature is not adequate in explaining observed patterns in the data. The third chapter characterizes the effect of the much-discussed 'brain drain' - the migration of relatively skilled workers from less to more advanced economies - on long-run development in the workers' home nation. A summary of the model is as follows: I employ a life cycle model with two countries, one poor and one rich, with endogenous migration and return migration decisions from and to the poor country. Workers working in the poor country receive wage offers from the rich country and decide to migrate to the rich country if the wage offer and subsequent wage growth gives them a higher lifetime utility than from staying in the poor country. The workers who migrate to the rich country have higher wage and skill growth rates than the workers in poor. The central question of this chapter is to evaluate the costs and benefits of a policy where the government of the poor country incentivizes the expatriates to return from the rich country to the poor country to take advantage of their superior skills that they accumulate while working in the rich country. The direct benefit from calling back workers from the rich country is the increase in output of the poor country because of the higher skills of return migrants relative to domestic workers. The indirect benefit to the poor country is the increase in skill level of domestic workers because of the positive externalities from the returning workers. However, every worker that is called back to work in the poor country must also be given high enough compensation so that he is indifferent between working in the two countries. This is the cost of bringing a worker back. These costs and benefits determine 1) whether it is beneficial to call expatriates back or not, and 2) which workers benefit the country the most. Results show that the economy can gain the most by calling back workers with skill levels that are 1.28 standard deviations above the mean skill level of domestic workers. In the model, since skill is a combination of education and experience, this skill level in real life can either correspond to highly skilled young professionals or highly experienced professional or a combination of both. Calling back workers of lower skill levels will lower the gain since their experience in the rich country would not be high and hence the superior skill accumulation would be lower. Calling back workers of higher skill levels will lower the gain since the cost of calling them back would be too high"--Page v-vii.