Budget-neutral capital tax cuts

Frédéric Dufourt, Lisa Kerdelhué and Océane Piétri

No 2143, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balancedbudget constraint. By contrast with its non-budget neutral equivalent-associated with a constant tax rate over time and a permanent increase in the level of public debt-we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.

Keywords: fiscal policy; capital tax cut; tax composition; heterogeneous agents; wealth redistribution (search for similar items in EconPapers)
JEL-codes: D31 E21 E6 H23 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-11
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
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Related works:
Journal Article: Budget-Neutral Capital Tax Cuts (2022)
Working Paper: Budget-Neutral Capital Tax Cuts (2022)
Working Paper: Budget-neutral capital tax cuts (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2143

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