Pareto-Improving Optimal Capital and Labor Taxes

Katharina Greulich, Sarolta Laczó and Albert Marcet

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study optimal Pareto-improving factor taxation when agents are heterogeneous in their labor productivity and wealth and markets are complete. Pareto-improving policies require a gradual reform: labor taxes should be cut, and capital taxes should remain high for a long time before reaching the limit. This policy redistributes wealth in favor of workers, promotes growth, and causes early deficits and government debt in the long run. We address several technical issues, such as sufficiency of Lagrangian solutions in a Ramsey problem, their relation to welfare functions, and solution algorithms. We also provide a proof that long-run capital taxes are zero.

Keywords: fiscal policy; factor taxation; Pareto-improving tax reform; redistribution (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Date: 2022-01, Revised 2022-08
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Pareto-Improving Optimal Capital and Labor Taxes (2023)
Working Paper: Pareto-Improving Optimal Capital and Labor Taxes (2016)
Working Paper: Pareto-Improving Optimal Capital and Labor Taxes (2016)
Working Paper: Pareto-Improving Optimal Capital and Labor Taxes (2015)
Working Paper: Pareto-Improving Optimal Capital and Labor Taxes (2008)
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