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Redistribution of Return Inequality

Karl Schulz

No 8996, CESifo Working Paper Series from CESifo

Abstract: Wealthier households obtain higher returns on their investments than poorer ones. How should the tax system account for this return inequality? I study capital taxation in an economy in which return rates endogenously correlate with wealth. The leading example is a financial market, where the rich acquire more financial information than the poor. Contrary to conventional wisdom, rather than calling for more redistribution, the presence of this scale dependence provides a rationale for lower marginal tax rates. The endogeneity of returns generates an inequality multiplier effect between wealth and its returns. Therefore, standard elasticity measures that determine the responsiveness of capital to taxes must be revised upwards. At an aggregate level, a rise in redistribution induces a compression effect on the distribution of pre-tax returns. In the financial market, I identify general equilibrium trickle-up externalities that provide a force for more redistribution relative to the partial equilibrium. Finally, I estimate partial and general equilibrium responses and demonstrate the quantitative importance of scale dependence for tax policy.

Keywords: optimal taxation; capital taxation; heterogeneous returns; wealth inequality; general equilibrium; asset pricing; private information; financial literacy (search for similar items in EconPapers)
JEL-codes: D31 G11 G12 G14 G53 H21 H23 H24 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-fle and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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