Budget-Neutral Capital Tax Cuts

Frédéric Dufourt (1) , Lisa Kerdelhué (1, 2) , Océane Piétri (3)

1 AMSE - Aix-Marseille Sciences Economiques
2 Centre de recherche de la Banque de France
3 University of Konstanz

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

Domains: Humanities and Social Sciences; Economics and Finance

Frédéric Dufourt, Lisa Kerdelhué, Océane Piétri. Budget-Neutral Capital Tax Cuts. Annals of Economics and Statistics, 2022, 146, pp.93-122. ⟨10.2307/48674140⟩. ⟨hal-04000531⟩