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Who should bear the burden of COVID-19 related ï¬ scal pressure? An optimal income taxation perspective

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

No 16713, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase ï¬ scal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is aï¬?ected by this increase. We calibrate the workhorse optimal income tax model to ï¬ ve European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the diï¬?erent countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in ï¬ scal pressure. For all countries, we ï¬ nd that the increase in ï¬ scal 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: 2021-11
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