Factor Taxation with Heterogeneous Agents

David Domeij () and Jonathan Heathcote ()

No 01-07, Working Papers from Duke University, Department of Economics

Abstract: We investigate the welfare implications of changing the mix between capital and labor taxes for a model economy in which heterogeneous households face uninsurable labor income risk. The stochastic process for labor earnings we construct is consistent with empirical estimates of earnings risk, and also implies a distribution of asset holdings across households closely resembling that in the United States. We find that a vast majority of households prefers the status quo to eliminating capital taxes. This finding is interesting in light of the fact that this reform would be optimal if we abstracted from heterogeneity and assumed a representative agent. A second finding is that a utilitarian government prefers the current calibrated U.S. capital income tax rate (39.7 percent) to any change in the capital tax rate.

JEL-codes: E62 H21 H23 H31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pke
Date: 2001
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Working Paper: Factor Taxation with Heterogeneous Agents (2000)
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