 Optimal Taxation of Capital in the Presence of Declining Labor ShareOrhan Erem Atesagaoglu and Hakki Yazici Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK Abstract: Numerous recent studies have documented that the labor's share in national income, which has been quite stable until the early 1980's, has been declining at a considerable rate since then. In this paper, we analyze the implications of this decline on the optimal capital and labor income taxation from the perspective of a government that needs to finance spending. Our main qualitative finding is that the optimal tax implications of the decline in the labor share depend on the mechanism responsible for it. In particular, if the labor share is declining because of rising market power or other mechanisms that raise the share of profits in national income, then this decline should optimally be accompanied with a rise in capital income taxes. If, on the other hand, the labor share is declining because of a rise in capital share, then it has no bearing on optimal capital income taxation. The quantitative significance of the decline in labor share for optimal capital taxes depends on the institutional details regarding the taxation of profits: in the baseline scenario, the optimal tax rate on capital income for the U.S. economy starts around zero in early 1980's and rises to about 25% by 2021 in response to the decline in labor share during the same period. Date: 2021-03-11 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:21/739 Access Statistics for this paper More papers in Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK |
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