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Research
New Researchers
progressive tax code? Together with Ivan Werning
from MIT, I’ve shown that, in fact, it does not,
because
Since additional work by superstars reaps outsized
rewards, discouraging their effort – even a little bit
– has larger revenue consequences and makes dis-
tortions from any given tax change larger. This
emphasizes that we really need more precise esti-
mates of the elasticity of taxable income of super-
star earners, rather than just measuring the change
in the distribution of earnings, which has received
the bulk of the recent attention.
At the beginning of this year, Swiss voters shot down
the government’s plan to reform corporate taxation,
a decision that could hurt the country’s appeal to
multinational companies. What is your assessment
of the situation in Switzerland?
The reform was intended to tackle a fundamental
problem: How to set different effective corporate
tax rates on firms that differ in their mobility?
Ideally, from the perspective of a single country,
we would want to tax internationally mobile firms
at lower rates than less mobile ones. But since a
direct discrimination is at odds with international
tax rules, the reform attempted to replicate it
indirectly, for example by allowing for lower rates
on research or equity intensive firms. While I
think this was generally a good idea, it was com-
bined with an overall reduction in effective rates.
These massive revenue losses eventually made it
politically infeasible. But these are really two
distinct issues. One might as well engineer a re-
form that achieves a similar differentiation but is
closer to being budgetneutral. I hope that a reform
along these lines will be more successful, in which
case I would neither expect major negative conse-
quences for firm location decisions nor overall tax
revenues.
Of course, from an international perspective, tax
harmonization would be the real solution, but it is
politically even harder to achieve. Interestingly, in
the US the idea of destination-based cash-flow
taxes is picking up steam right now; this is a sys-
tem that would also reduce the incentives for firms
to move their location for tax reasons. So we will
continue to see some exciting (at least to me!)
discussions about corporate taxation, not just in
Switzerland, in the near future.
The UBS Center helps academics get their message
across to policymakers, business leaders, and the
public at large. What is the main message you
would like to convey?
As the examples above convey, I have been trying to
achieve two goals with my work. On the one hand,
move the traditionally quite abstract academic
literature on optimal taxation a bit closer to the
issues that have dominated the real-life policy dis-
cussions in the recent past. On the other hand,
perhaps also inject some rigorous science into the
public debate about taxes. I think this aligns very
well with the objectives of the UBS center, and I
hope we will be able to expand on it in the future. I
sense a lot of interest from policymakers and the
business community in nonpartisan, policy-relevant
research if we make the effort to communicate it.
You spent the past 11 years living, studying, and
working in the U.S. What drew you to Switzerland
and the University of Zurich?
I greatly enjoyed spending such an extended period
of my life in the U.S., having first lived five years in
Massachusetts and then almost seven years in Cali-
fornia. I am sure it has left a permanent mark on
me, both professionally and personally. But being
originally from Germany, I always had the intention
to return to Europe if the professional conditions
became sufficiently attractive. The Economics De-
partment in Zurich has made some terrific progress
in this direction over the past few years, and I am
excited to contribute to this trajectory in the future.
In addition, our twin boys were born last year, so
now was the perfect time to no longer have a twelve-
hour flight between us and our families!
“while superstar effects make
the earnings distribution
more unequal, they should
also increase the responsive-
ness of individual incomes to
tax changes.”