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Who Should Bear the Burden of Covid-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective

Mehmet Ayaz, Lea Fricke, Clemens Fuest () and Dominik Sachs

No 358, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: The Covid-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase in fiscal pressure. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. We apply the inverse-optimum approach to the pre-Covid-19 economies. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

Keywords: Fiscal pressure; optimal taxation (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-eec, nep-ore, nep-pbe and nep-pub
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