The Distributional Consequences of Tax Reforms Under Capital–Skill Complementarity

Konstantinos Angelopoulos, Bernardo Fernandez and Jim Malley

Economica, 2014, vol. 81, issue 324, 747-767

Abstract: type="main" xml:id="ecca12087-abs-0001">

This paper analyses wage inequality and the welfare effects of changes in capital and labour income tax rates for different types of agents. To achieve this, we develop a model that allows for capital–skill complementarity given non-uniform distributions of asset holdings and labour skills. We find that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the inequality effects of capital tax reductions are lower over the transition period compared with the long run.

Date: 2014
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