Optimal Taxation for Economy with Idiosyncratic Shocks and Aggregate Uncertainty

15:40-17:00, Wednesday, June 12, 2024

I-206, Boxue Building, DUFE

Dr. Zhigang Feng is an Associate Professor in the Department of Economics at the University of Nebraska at Omaha. He earned his Ph.D. in Economics from the University of Miami in 2009. Prior to joining UNO, Dr. Feng has held teaching positions at the University of Illinois at Urbana-Champaign, the University of Zurich, and Purdue University. His research primarily focuses on Macroeconomics, Computational Economics, Public Finance, and Labor Economics. Currently, his research endeavors are centered around developing innovative numerical methods, utilizing artificial intelligence, to solve large-scale dynamic equilibrium models. These models are instrumental in understanding optimal fiscal policy and debt sustainability. Dr. Feng has published articles in several top-tier general-interest and field-specific economics journals, including the International Economic Review, Review of Economic Dynamics, Quantitative Economics, and Economic Theory. He is also a sought-after speaker, having been invited to present his work at numerous prestigious universities, central banks, and international conferences.

This paper characterizes the Markov Perfect Equilibrium for optimal taxation in a heterogeneous agent model with aggregate uncertainty. We develop a novel machine learning-based approach that combines histogram-based distribution approximation, deep neural networks for equilibrium function approximation, a modified value and policy iteration algorithm with a penalty method, and an analytically derived distribution transition kernel. Our method addresses the curse of dimensionality and the challenges posed by strategic interactions between households and the government, allowing us to characterize the global dynamics of the economy starting from any initial distribution. 

 Our quantitative analysis reveals that optimal fiscal policy in the presence of heterogeneous agents and aggregate uncertainty differs significantly from that in representative agent models. The government's optimal taxation decisions are influenced by the distribution of assets and the evolution of inequality over time. We find that the government's ability to redistribute resources through capital and labor income taxes plays a crucial role in shaping the dynamics of inequality. The optimal tax rates respond to changes in the asset distribution and aggregate shocks, highlighting the importance of considering household heterogeneity in the design of fiscal policies.

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