Overcoming Wealth Inequality by Capital Taxes that Finance Public Investment

Linus Mattauch, David Klenert, Joseph Stiglitz and Ottmar Edenhofer

No 25126, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Wealth inequality is rising in rich countries. Capital taxation used simply to finance redistribution may not be able to counteract this trend, but can increased public investment financed by higher capital taxes? We examine how such a policy affects the distribution of wealth in a setting with distinct wealth groups: dynastic savers and life-cycle savers. Our main finding is that public investment financed through capital taxes always decreases wealth inequality when the elasticity of substitution between capital and labor is moderately high. Indeed, for all elasticities of substitution greater than a threshold value, at high enough capital tax rates, dynastic savers disappear in the long run. Below these rates, both types of households co-exist in equilibrium with life-cycle savers gaining from the higher capital tax rates. These results are robust with respect to the different roles of public investment in production. We calibrate our model to OECD economies and find the threshold elasticity to be 0.82.

JEL-codes: D31 E21 H31 H41 H54 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-mac, nep-pbe, nep-pke and nep-pub
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Citations: View citations in EconPapers (6)

Published as Linus Mattauch & David Klenert & Joseph E. Stiglitz & Ottmar Edenhofer, 2022. "Overcoming wealth inequality by capital taxes that finance public investment," Structural Change and Economic Dynamics, .

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