Optimal Taxation of Capital in the Presence of Declining Labor Share

Orhan Erem Atesagaoglu and Hakki Yazici

No 9101, CESifo Working Paper Series from CESifo

Abstract: We analyze the implications of the decline in labor’s share in national income for optimal Ramsey taxation. It is optimal to accompany the decline in labor share by raising capital taxes only if the labor share is falling because of a decline in competition or other mechanisms that raise the share of pure profits. This result holds under various alternative institutional arrangements that are relevant for optimal taxation of capital income. A quantitative application to the U.S. economy shows that soaring profit shares since the 1980's can justify a significantly increasing path of capital income taxes.

Keywords: capital income tax; labor share; profit share; market power (search for similar items in EconPapers)
JEL-codes: E60 E61 E62 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9101

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