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

Dominik Sachs, Mehmet Ayaz, Lea Fricke and Clemens Fuest

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 affected 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 different 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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