Network Structure as a Deep Parameter and the Validity of Elasticity Estimates

This paper argues that the network structure of an economy, or more specifically, how economic sectors are connected through input-output links, matters to issues such as tax burden distribution, tax revenue, labor supply response to taxes, etc. I discuss the role of network links by comparing a parallel-structure economy and a chain-structure economy. In my model, if two sectors are parallel with both producing final consumption goods, the taxation of one sector will create larger utility loss for the taxed sector. In contrast, if the two sectors have a upstream-downstream chain structure, the two sectors have exaclty the same utility loss. Moreover, in an n-sector-chain economy, taxing different combinations of the sectors achieves the identical same equilibrium result: labor supply in each sector, utility loss, consumption, tax revenue, GDP, etc. In addition, in a chain economy the elasticity of taxable income with respect to a uniform labor income tax is higher. Lastly, I argue that this network structure view impose reveals threats to the validity of variuos elasticitiy estimates. I would like thank Leora Friedberg, Scott Laughery and John Pepper for very thoughtful comments and discussions. All errors are my own.