Budget-Neutral Capital Tax Cuts

Frédéric Dufourt, Lisa Kerdelhué and Océane Piétri

Annals of Economics and Statistics, 2022, issue 146, 93-121

Abstract: We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balanced-budget constraint. By contrast with its non-budget neutral equivalent - associated with a constant tax rate over time and a permanent increase in the level of public debt - we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.

Keywords: Fiscal Policy; Capital Tax Cut; Tax Composition; Heterogeneous Agents; Wealth Redistribution (search for similar items in EconPapers)
JEL-codes: D31 E21 E6 H23 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Budget-Neutral Capital Tax Cuts (2022)
Working Paper: Budget-neutral capital tax cuts (2021)
Working Paper: Budget-neutral capital tax cuts (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2022:i:146:p:93-121

DOI: 10.2307/48674140

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