Supply Side Interventions and Redistribution

Teresa Garcia-Mila, Albert Marcet and Eva Ventura

Economic Journal, 2010, vol. 120, issue 543, 105-130

Abstract: We evaluate the effect on welfare of shifting the burden of capital income taxes to labour taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates. We calibrate and simulate the economy; we find that lowering capital taxes has two effects: it increases efficiency in terms of aggregate production and it redistributes wealth in favour of those agents with a low wage/wealth ratio. When the parameters of the model are calibrated to match the distribution of income in terms of the wage/wealth ratio, the redistributive effect dominates, and agents with a high wage/wealth ratio would experience a large loss in utility if capital income taxes were eliminated. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Date: 2010
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