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Redistributive Capital Taxation Revisited

Ozlem Kina, Ctirad Slavik and Hakki Yazici

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is significantly higher than the optimal rate of 48% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.67 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a government that cares about redistribution should take into account capital-skill complementarity in production when setting the tax rate on capital income.

Keywords: capital taxation; capital-skill complementarity; inequality; redistribution (search for similar items in EconPapers)
JEL-codes: E25 J31 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac, nep-pbe and nep-pub
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