Inequality and the Macroeconomy: Academic and Policy Challenges | April 2024
Other panel participants listen as Rakeen Mabud speaks.
Panel participants (left to right): Sarah Anderson, Niko Lusiani, Susana Ruiz, Rakeen Mabud, and Ignacio Gonzalez


IMPA celebrated its first anniversary on April 17, 2024, with a colloquium on Inequality and the Macroeconomy: Academic and Policy Challenges.

The first session featured academic inquiries related to IMPA’s mission, and the second session featured a panel discussion of the 2024-25 tax debates.

Academic Inquiries

Minsu Chang, (Assistant Professor of Economics at Georgetown University) presented “On the Effects of Monetary Policy Shocks on Income and Consumption Heterogeneity”  The paper uses a new framework  to show that monetary policy shocks may increase consumption inequality. The estimates of the impacts, however, are imprecise. This focus corresponds with IMPA’s work studying the implications of policy outcomes on income and wealth inequality.

Impulse response functions showing increase inn 90-10 ratio and Gini coefficient, with confidence intervals that include zero.

Selin Seçil Akin (Postdoctoral Research Fellow in Economics at American University) presented “Gender Perspectives on Fiscal Policy and Debt,” which explores the asymmetric effects of fiscal policy on gender-specific employment outcomes. The presentation summarized work from Seçil’s dissertation showing that fiscal consolidation decreased women’s labor force participation relative to men’s, and it previewed ongoing work showing that countries with more social infrastructure spending increases opportunities for women relative to men. Seçil’s work complements IMPA’s mission to account for differential impacts when evaluating the impact of policy.

Impulse response functions showing decrease in women's labor force participation. Confidence intervals include zero for first 3 years after policy but do not include zero 3 to 8 years after policy.

The 2024-2025 Tax Debates

In her introduction, moderator Sarah Anderson (Director of the Global Economy Project and Co-Editor of at the Institute for Policy Studies) emphasized that now an interesting time in tax policy. The 2017 Tax Cuts and Jobs Act (TCJA) has many pieces expiring soon. Regardless of who wins the White House in 2024, there will be a tax policy debate. Addressing students, she noted that there is a need for people with expertise in taxation who bring “a public interest lens to the work.” This was particularly important, she emphasized, because the tax system is important for a healthy economy and a healthy democracy.

Sara first asked Rakeen Mabud (Chief Economist and Managing Director of Policy and Research at the Groundwork Collaborative) to summarize her view of the impact of the TCJA. Rakeen explained that, while the supporters of the TCJA promised broad positive impact, 80 percent of the benefits of the tax cuts went to the richest 10 percent of households, while median wage growth slowed in 2018 and 2019. Additionally, the TCJA incentivized stock buybacks, which not only displaced investments but also sharply increased wealth inequality. The TCJA therefore provided another example of how trickle-down approach doesn’t work. She also emphasized that the upcoming debates were an opportunity – a chance to redraw the rules to build an economy for the future that works for everyone. To that end, she advocated opening the debate beyond the expiring provision to include raising the top corporate tax rate.

Niko Lusiani (Director of the program on Corporate Power at the Roosevelt Institute) asked the audience to think about “four Rs” that represent the four purposes of taxes: (1) revenue, (2) redistribution, (3) regulation, and (4) representation. He focused on the last two. Historically, corporate taxes were part of Progressive Era antitrust regulation. The idea was to disincentivize firms from accumulating too much market power. By “representation,” he meant that a fair tax system is intended to enhance public trust in government. He advocated for raising the top corporate rate and returning to a graduated corporate tax system, noting that a recent study of 10,000 large multinational companies found that supernormal returns (or “rents”) were 70 percent of total profits. Supernormal returns were concentrated in the largest companies, and in particular US headquartered in the U.S.

IMPA Co-Director Ignacio Gonzalez (Assistant Professor of Economics at American University) emphasized that the current opportunity to reshape the tax code differs from the tax overhauls of the 1980s and early 2000s because economists have an improved understanding of the effects of changes in taxes. For example, he said that it is well understood that taxes on dividends don’t have negative effects on investment, something that was not recognized earlier. Thus, the tax code can be harnessed more effectively today to address wealth inequality. He advocated thinking of dividend taxes, capital gains taxes, and corporate taxes as elements of a unified policy to reduce inequality. Importantly, he said, the key policy question is not whether to raise the corporate tax, but how much to raise it. He suggested the optimal rate is probably higher than the 28 percent being discussed these days.

Susana Ruiz (Global Lead on Tax Justice at OXFAM International) emphasized the importance of the international aspect of corporate tax law, focusing on three elements: the tax rate for multinational corporations, a tax on the global wealthy, and international tax governance. In addition to avoiding a race to the bottom by agreeing on rates, she noted that it’s important for countries to agree on how define the tax base for the corporate rate. This task is complicated by the emergence of corporations without a “home country,” and the digitalization of commerce. This trend in globalization has allowed the wealthiest to evade taxes everywhere, further contributing to global inequality. These issues raise the question of how – and by whom – the international tax system should be managed. Susana expressed optimism that the task of redesigning the 100-year-old corporate tax system to match modern needs of a truly global economy would be undertaken at the United Nations rather than being wholly located in rich countries.

Workshop on Post-Pandemic Macroeconomics | March 2024

Together with Columbia University’s Institute for Policy Dialogue and Center for Political Economy, IMPA co-sponsored the Workshop on Post-Pandemic Macroeconomics, held at Columbia’s School of International and Public Affairs on March 22-23, 2024.

The Workshop featured academic sessions on several aspects of the recovery. Co-Director Juan Montecino presented “Asset Prices, Market Power, and Optimal Corporate Taxation.” The paper, co-authored with Co-Director Ignacio Gonzalez and Board Member Joseph E. Stiglitz, builds out the theoretical foundation for IMPA’s model.

The Workshop concluded with a public panel, “Did the Central Banks Get it Right? Post-Pandemic Inflation and Disinflation: Explanations and Lessons.” The panel was moderated by Board Member Martin Guzman. The panelists were Paul Beaudry, Glenn Hubbard, Lindsay Owens, and Joseph E. Stiglitz.

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Symposium on Tax Policy in an Unequal Economy | April 2023

The audience watches Prof. Clausing give her remarks.

“The Symposium on Tax Policy in an Unequal Economy,” held at American University, was IMPA’s inaugural event. It featured presentations and a panel discussion on taxation policy in the United States. The objective was to facilitate a dialogue between policy practitioners and economists on the accurate modeling of significant economic developments, such as changes in market power and inequality, in the assessment of policy proposals. The discussions emphasized the pivotal role played by models in the policy process and recognized the contributions of the new IMPA model. The symposium took place on Monday, April 17th, 2023, at American University in Washington, DC.

Models and Policymaking

Professor Stiglitz gave the opening remarks. He explored how policy models have influenced debates on various economic proposals, from the response to the Great Recession to the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017. These models shape the debates by evaluating the potential beneficiaries, costs, and aggregate effects of new policies, thereby guiding the decision-making process for policy adoption. However, the predictions made by many major models regarding the effects of these policies did not materialize in the real world. Professor Stiglitz asserted that this discrepancy stems from flawed assumptions made by these models, leading to incorrect conclusions. He exhorted economists to ensure that their assumptions preserve the relevant aspects of the economy. For instance, market power significantly influences firms’ responses to tax policy changes. When tax policy models assume negligible market power, the projected effects of tax reforms differ greatly from those of models incorporating market power.

Professor Stiglitz highlighted how academia has long recognized these issues, yet major policy models have failed to address them. He commended IMPA for proposing a tax policy model that genuinely incorporates market power, demonstrating the sensitivity of predicted effects of capital income taxes to varying degrees of market power and other relevant factors. He argued that all policy models should enhance transparency by explicitly discussing their assumptions and the impact of these assumptions on their policy recommendations. This approach would facilitate future model comparisons and improve the quality of policy debates that rely on these models.

Capital Taxation and Market Power

Professor Kimberly Clausing presented her research on capital taxation and market power. She emphasized the increasing presence of market power in the United States and globally, highlighting its various policy implications such as rising inequality, increased benefits of antitrust policy, and altered effects of capital taxes. She advocated for corporate taxation as an effective means to address the surge in market power rents. Proposing a graduated corporate income tax, she illustrated how taxing above-normal profits resulting from market power can help mitigate the expansion of market power without distorting decisions related to employment and investment.

The Tax Debate

The panelists facing the audience.

The event concluded with a panel comprised of both policy practitioners and academic economists, who engaging in a discussion on the role of models in policymaking debates. The panel focused on tax policy, the limitations of existing policy models (such as those by the Congressional Budget Office and the Penn Wharton Budget Model), and the potential benefits of alternative models that incorporate realistic levels of market power across different markets. They underscored the significance of these assumptions when evaluating issues like taxation policy and the minimum wage.

The panel deliberated on various crucial topics, including the vital role played by policy models in shaping debates surrounding significant economic policies like the TCJA, as well as the necessity for transparency in constructing and explaining models. Professor González explained the IMPA model’s assumptions and main results. For instance, he explained that introducing market power into an otherwise standard policy model has important effects on wealth inequality, which in turn has fundamental implications for the design of tax policies like the TCJA. The panel acknowledged that having alternative models with transparent assumptions can establish a more robust platform for policy debates and their consequences.

Panel participants

  • Kimberly Clausing, Eric M. Zolt Professor of Tax Law and Policy, UCLA School of Law.
  • Michael Linden, Executive Associate Director, Office of Management and Budget.
  • Kitty Richards, Former Director of State and Local Fiscal Recovery Funds.
  • Ignacio González, Co-Director of IMPA and Assistant Professor of Economics, American University.

Closing Remarks

Concluding the conference, Professor Simon Johnson addressed the challenges posed to policymakers by emerging technologies, such as automation and artificial intelligence. He underscored the relevance of these technologies to the conference discussions, as they have the potential to accelerate the already increasing trends of market power highlighted by previous speakers. Professor Johnson emphasized the significance of IMPA’s work and its new model, as it effectively illustrates the effects of market power and income distribution when analyzing tax policies. He contended that policy debates should move beyond mere 10-year predictions and instead adopt a more long-term perspective, comparing the assumptions of different models side by side. He argued that the work by IMPA is particularly urgent, given the rapid pace of market power expansion, necessitating a better assessment of policies like the TCJA rather than relying on models that have struggled to keep pace with significant trends.

Policy Perspectives on Market Power | March 2023

Professor Montecino (standing) introduces Professor Stiglitz (seated).

IMPA’s “Policy Perspectives on Market Power” was a small, high-powered conference that featured research presentations and wide-ranging discussions on the most crucial implications of market power for policymaking. The event aimed to provide a forum for leading policymakers and academics to present and discuss the causes and consequences of market power, focusing on the outcomes for fiscal, monetary and competition policy. The conference was held on Friday, March 3rd, 2023, at Columbia University, New York City, NY.

The conference was held in collaboration with The Initiative for Policy Dialogue (IPD) and Columbia Business School.

Getting the Models Right

Opening the conference, Prof. Joseph E. Stiglitz emphasized the crucial importance of macroeconomic models for policy making, since these models play a key role in determining which policies get blessed by institutions such as the Congressional Budget Office (CBO). However, these models often make problematic assumptions – such as assuming markets are perfectly competitive – which do not reflect the flaws of markets in the real world. For example, labor market imperfections, such as monopsony power, have a significant impact on how firms behave and how shifts in aggregate demand get transmitted to employment and wages. Yet such imperfections are not fully incorporated into models.

Getting the models right with respect to market power is therefore critical, Prof. Stiglitz said, because the implications of market power for monetary and fiscal policy were enormous. The key message for researchers and practitioners was that market power needs to be taken into account when thinking about what monetary policy ought to be in the current inflationary episode. Models that move away from the competitive equilibrium assumption have a different set of policy implications. The need of the hour, he noted, was a theory of endogenous change in markups and how policy affects them.

Research Presentations

The event consisted of three sessions, each with two presentations, complemented by discussions. There were three key takeaways:

  1. Market power makes a difference in the conduct of policy (whether monetary, fiscal or competition policy);
  2. More research is needed into the causes of market power;
  3. Old ideas and ways of thinking about policy need to be revisited in light of the new economic realities shaped by market power.

Session 1: Policy Aspects of Market Power

Labor Market Power and Antitrust Enforcement, by Ioana Marinescu (University of Pennsylvania and US Department of Justice, DoJ)

Data and Market Power, by Laura Veldkamp (Columbia University)

Session 2: Market Power and Taxation

Aggregate and Distributional Consequences of Corporate Taxation, by Juan Montecino (American University)

Markups and Inequality, by Corina Boar (New York University)

Session 3: Monetary Policy and Market Power

Market Power and Monetary Policy Transmissionby Davide Furceri (International Monetary Fund)

Monetary Policy under Labor Market Power, by Anastasia Burya (Columbia University)

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