Incidence of Capital Income Taxation in a Lifecycle Economy with Firm Heterogeneity

Chung Tran and Sebastian Wende

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. It is indeed important to account for firm heterogeneity in productivity and investment financing as well as household heterogeneity in age and skill. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the existing U.S. tax treatment for capital income, reforms that shift tax burden from the firm to household side potentially result in efficiency gains and overall welfare improving. However, the welfare benefits of the tax reforms are quite different across households and generations over transition time, depending on skill, age-cohort and budget balancing tax instruments. In particular, majority of currently alive households, especially retirees, experience welfare gains under moderate corporate income tax cuts, but suffer from welfare losses under more radical tax cuts.

Keywords: Excess burden; Tax incidence; Distributional effects; Overlapping generations; Dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: D21 E62 H21 H22 H25 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2019-670

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