Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-27T05:01:16.445Z Has data issue: false hasContentIssue false
  • English
  • Français

WHY ARE CAPITAL INCOME TAXES SO HIGH?

Published online by Cambridge University Press:  01 June 2009

Martin Floden
Martin Floden*
Affiliation:
Stockholm School of Economics and CEPR
*
Address correspondence to: Martin Floden, Department of Economics, Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden; e-mail: martin.floden@hhs.se.
Get access Rights & Permissions [Opens in a new window]

Abstract

The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded by higher taxes on labor income, whereas households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto-improving reforms typically exist, but the welfare gains of such reforms are modest.

Keywords

Optimal TaxationInequalityRedistribution
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 279 - 304
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Atkeson, Andrew, Chari, V. V., and Kehoe, Patrick (1999) Taxing capital income: A bad idea. Federal Reserve Bank of Minneapolis Quarterly Review, 3–17.Google Scholar
Auerbach, Alan and Kotlikoff, Laurence (1987) Dynamic Fiscal Policy. Cambridge, MA: Cambridge University Press.Google Scholar
Bassetto, Marco and Benhabib, Jess (2006) Redistribution, taxes, and the median voter. Review of Economic Dynamics 9, 211–223.CrossRefGoogle Scholar
Budría Rodríguez, Santiago, Díaz-Giménez, Javier, Quadrini, Vincenzo, and Ríos-Rull, José-Víctor (2002) Updated facts on the U.S. distributions of earnings, income, and wealth. Federal Reserve Bank of Minneapolis Quarterly Review, 2–35.Google Scholar
Carey, David and Tchilinguirian, Harry (2000) Average Effective Tax Rates on Capital, Labour, and Consumption. OECD Economics Department Working Paper 258.Google Scholar
Chamley, Christopher (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54, 607–622.CrossRefGoogle Scholar
Chari, V. V. and Kehoe, Patrick (1999) Optimal fiscal and monetary policy. In Taylor, John and Woodford, Mark (eds.), Handbook of Macroeconomics. Amsterdam: North Holland.Google Scholar
Chari, V. V., Christiano, Lawrence, and Kehoe, Patrick (1994). Optimal fiscal policy in a business cycle model. Journal of Political Economy 102, 617–652.CrossRefGoogle Scholar
Cooley, Thomas and Hansen, Gary (1992) Tax distortions in a neoclassical monetary economy. Journal of Economic Theory 58, 290–316.CrossRefGoogle Scholar
Cooley, Thomas and Prescott, Edward (1995) Economic growth and business cycles. In Cooley, Thomas (ed.), Frontiers of Business Cycle Research. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Correia, Isabel (1999) On the efficiency and equity trade-off. Journal of Monetary Economics 44, 581–603.CrossRefGoogle Scholar
Domeij, David and Floden, Martin (2006) The labor-supply elasticity and borrowing constraints: why estimates are biased. Review of Economic Dynamics 9, 242–262.CrossRefGoogle Scholar
Domeij, David and Heathcote, Jonathan (2004) On the distributional effects of reducing capital taxes. International Economic Review 45, 523–554.CrossRefGoogle Scholar
Domeij, David and Klein, Paul (2005) Pre-announced optimal tax reform. Macroeconomic Dynamics 9, 150–169.CrossRefGoogle Scholar
Garcia-Milà, Teresa, Marcet, Albert, and Ventura, Eva (2001) Supply Side Interventions and Redistribution. Manuscript, Universitat Pompeu Fabra.Google Scholar
Gomme, Paul and Rupert, Peter (2007) Theory, measurement and calibration of macroeconomic models. Journal of Monetary Economics 54, 460–497.CrossRefGoogle Scholar
Greenwood, Jeremy, Hercowitz, Zvi, and Huffman, Gregory W. (1988) Investment, capacity utilization, and the real business cycle. American Economic Review 78, 402–417.Google Scholar
Judd, Kenneth L. (1985) Redistributive taxation in a simple perfect foresight model. Journal of Public Economics 28, 59–84.CrossRefGoogle Scholar
King, Robert, Plosser, Charles, and Rebelo, Sergio (1988) Production, growth, and business cycles: I. The basic neoclassical model. Journal of Monetary Economics 21, 195–232.CrossRefGoogle Scholar
King, Robert and Rebelo, Sergio (2000) Resuscitating real business cycles. In Taylor, John and Woodford, Mark (eds.), Handbook of Macroeconomics. Amsterdam: North Holland.Google Scholar
Kocherlakota, Narayana (2005) Zero expected wealth taxes: A Mirrlees approach to dynamic optimal taxation. Econometrica 73, 1587–1621.CrossRefGoogle Scholar
Krusell, Per, Quadrini, Vincenzo, and Ríos-Rull, José-Victor (1996) Are consumption taxes really better than income taxes? Journal of Monetary Economics 37, 475–503.CrossRefGoogle Scholar
Ljungqvist, Lars and Sargent, Thomas (2004) Recursive Macroeconomic Theory, 2nd ed.Cambridge, MA: MIT Press.Google Scholar
Lucas, Robert E. Jr., (1990) Supply-side economics: An analytical review. Oxford Economic Papers 42, 293–316.CrossRefGoogle Scholar
Lucas, Robert E. Jr. (2003) Macroeconomic priorities. American Economic Review 93, 1–14.CrossRefGoogle Scholar
Maddison, Angus (1991) Dynamic Forces in Capitalist Development. Oxford, UK: Oxford University Press.Google Scholar
Mehra, Rajnish and Prescott, Edward (1985) The equity premium: A puzzle. Journal of Monetary Economics 15, 145–161.CrossRefGoogle Scholar
Nishiyama, Shinichi and Smetters, Kent (2005) Consumption taxes and economic efficiency with idiosyncratic wage shocks. Journal of Political Economy 113, 1088–1115.CrossRefGoogle Scholar
Prescott, Edward (1986) Theory ahead of business cycle measurement. Federal Reserve Bank of Minneapolis Quarterly Review 10, 9–22.Google Scholar