Overcoming wealth inequality by capital taxes that finance public investment

Linus Mattauch, David Klenert, Joseph Stiglitz and Ottmar Edenhofer

Structural Change and Economic Dynamics, 2022, vol. 63, issue C, 383-395

Abstract: Wealth inequality is rising in high-income countries. Can increased public investment financed by higher capital taxes counteract this trend? We examine how such a policy affects the distribution of wealth in a setting with distinct wealth groups: dynastic savers and life-cycle savers. Our main finding is that this policy always decreases wealth inequality when the elasticity of substitution between capital and labor is moderately high. At high capital tax rates, dynastic savers disappear. Below these rates, life-cycle savers gain from the higher public expenditures financed by the higher capital tax rates. We calibrate our model to OECD economies and find a threshold elasticity of 0.82.

Keywords: Public capital; Capital taxation; Wealth distribution; Household heterogeneity; Saving behavior (search for similar items in EconPapers)
JEL-codes: D31 E21 H22 H31 H41 H54 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Overcoming Wealth Inequality by Capital Taxes that Finance Public Investment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:63:y:2022:i:c:p:383-395

DOI: 10.1016/j.strueco.2022.05.009

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