Labor and capital income taxation, fiscal competition, and the distribution of wealth

Clemens Fuest and Bernd Huber

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper studies optimum income taxation in a small open economy where households differ with respect to their endowments with wealth. The government raises taxes on income from labor and wealth and a source tax on capital used in domestic production. To avoid taxes, households may, at some cost, shift capital to labor income and vice versa. The government can only observe income after shifting has taken place. It turns out that the optimal source tax on capital is negative. The optimal income tax is characterized by a positive marginal tax rate for the wealthy households, which is equal for labor income and income from wealth. For the poor households, the marginal tax rate on capital income is higher than that on labor income. We also study international tax coordination and show that a reduction in the source subsidy on capital raises welfare.

Date: 2001
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Published in Journal of Public Economics 1 79(2001): pp. 71-91

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Journal Article: Labor and capital income taxation, fiscal competition, and the distribution of wealth (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:20294

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