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Macroeconomic effects of capital tax rate changes

Saroj Bhattarai, Jae Won Lee, Woong Yong Park and Choongryul Yang

No 7630, CESifo Working Paper Series from CESifo

Abstract: We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a dynamic equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in the skill premium. Moreover, the expansionary long-run aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut. An extension to a model with heterogeneous households shows that consumption inequality increases in the long-run. We study transition dynamics and show that short-run effects depend critically on the monetary policy response: whether the central bank allows inflation to directly facilitate government debt stabilization and how inertially it raises interest rates. Finally, we contrast the long-term aggregate welfare gains with short-term losses, as well as in the model with heterogeneous households, show that welfare gains for the skilled go together with welfare losses for the unskilled.

Keywords: capital tax rate; permanent change in the tax rate; capital-skill complementarity; skill premium; inequality; transition dynamics; monetary policy response (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E62 E63 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Macroeconomic Effects of Capital Tax Rate Changes (2022) Downloads
Working Paper: Macroeconomic Effects of Capital Tax Rate Changes (2020) Downloads
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