Budget-Neutral Capital Tax Cuts

Frédéric Dufourt, Lisa Kerdelhué and Océane Piétri
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Océane Piétri: University of Konstanz

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Abstract: We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balanced-budget constraint. By contrast with its non-budget neutral equivalent-associated with a constant tax rate over time and a permanent increase in the level of public debt-we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.

Keywords: Fiscal Policy; Capital Tax Cut; Tax Composition; Heterogeneous Agents; Wealth Redistribution (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-des, nep-dge, nep-mac and nep-pbe
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Published in Annals of Economics and Statistics, 2022, 146, pp.93-122. ⟨10.2307/48674140⟩

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Related works:
Journal Article: Budget-Neutral Capital Tax Cuts (2022)
Working Paper: Budget-neutral capital tax cuts (2021)
Working Paper: Budget-neutral capital tax cuts (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04000531

DOI: 10.2307/48674140

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