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The Distributional Consequences of Supply-Side Reforms in General Equilibrium

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  • Konstantinos Angelopoulos
  • Bernardo X. Fernandez
  • Jim Malley

Abstract

Using a heterogeneous agent model allowing for different degrees of complementarity between capital, skilled and unskilled labour, this paper evaluates supply-side reforms consistent with lower public debt-to-GDP in the long-run. We find that, relative to the other tax reforms, capital tax cuts lead to the highest aggregate welfare but are skill-biased and can thus increase inequality in the long-run. Depending on the elasticity of substitution between capital and unskilled labour, falls in the capital tax can result in welfare losses for unskilled workers, even in the absence of other frictions and increases in other forms of taxation. On the other hand, reductions in labour taxes can hurt the capitalists. We also show that including the transition period in the welfare evaluation lowers the inequality effects of capital tax reduc-tions since the complementarity between capital and all labour inputs is higher in the short- than in the long-run. Finally, our results suggest that a form of "irrational exuberance" can arise after a tax cut under heterogeneous learning in the initial conditions after the reform.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3504.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3504

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Keywords: tax reform; structural heterogeneity; inequality; adaptive learning;

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References

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  8. Konstantinos Angelopoulos & James Malley & Apostolis Philippopoulos, 2011. "Time-consistent fiscal policy under heterogeneity: Conflicting or common interests?," Working Papers, Business School - Economics, University of Glasgow 2011_06, Business School - Economics, University of Glasgow.
  9. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2008. "Tax Structure, Growth and Welfare in the UK," Working Papers, Business School - Economics, University of Glasgow 2008_05, Business School - Economics, University of Glasgow, revised Apr 2008.
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  22. Angelopoulos, Konstantinos & Malley, James, 2008. "Tax Structure, Growth and Welfare in the UK," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-18, Scottish Institute for Research in Economics (SIRE).
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Cited by:
  1. Konstantinos Angelopoulos & James R. Malley & Wei Jiang, 2011. "The distributional consequences of tax reforms under market distortions," Working Papers, Business School - Economics, University of Glasgow 2011_21, Business School - Economics, University of Glasgow.
  2. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2011. "The distributional consequences of tax reforms under market distortions," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-73, Scottish Institute for Research in Economics (SIRE).

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