The distributional consequences of tax reforms under market distortions

Konstantinos Angelopoulos, Wei Jiang and Jim Malley

No 2011-73, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: In this paper we examine the importance of imperfect competition in product and labour markets in determining the long-run welfare e¤ects of tax reforms assuming agent heterogeneneity in capital hold- ings. Each of these market failures, independently, results in welfare losses for at least a segment of the population, after a capital tax cut and a concurrent labour tax increase. However, when combined in a realistic calibration to the UK economy, they imply that a capital tax cut will be Pareto improving in the long run. Consistent with the the- ory of second-best, the two distortions in this context work to correct the negative distributional e¤ects of a capital tax cut that each one, on its own, creates.

Keywords: market imperfections; heterogeneous agents; unemployment; tax reform (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: The Distributional Consequences of Tax Reforms under Market Distortions (2011)
Working Paper: The distributional consequences of tax reforms under market distortions (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:356

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