Understanding international differences in the skill premium: The role of capital taxes and transfers

Shuhei Takahashi and Ken Yamada

Journal of Economic Dynamics and Control, 2022, vol. 143, issue C

Abstract: We show that the size of the tax and transfer system affects the level of wage inequality in a heterogeneous agent/incomplete markets model, extended to allow for capital–skill complementarity. The skill premium can decrease significantly with an increase in the size of the tax and transfer system due to a rise in the capital income tax rate when idiosyncratic shocks to labor productivity are not insurable. The differences in the steady-state skill premium under different capital income tax rates are consistent with those observed across countries.

Keywords: Wage inequality; Capital–Skill complementarity; Incomplete markets; Capital income taxes; Composition effect (search for similar items in EconPapers)
JEL-codes: E13 E24 E62 H24 J31 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922002159

DOI: 10.1016/j.jedc.2022.104511

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