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Why Are Capital Income Taxes So High?

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  • Floden, Martin

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 labour income while 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.

Suggested Citation

  • Floden, Martin, 2007. "Why Are Capital Income Taxes So High?," CEPR Discussion Papers 6366, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6366
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    Cited by:

    1. Katharina Greulich & Sarolta Laczó & Albert Marcet, 2023. "Pareto-Improving Optimal Capital and Labor Taxes," Journal of Political Economy, University of Chicago Press, vol. 131(7), pages 1904-1946.
    2. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
    3. Gourio, François, 2009. "Is there a majority to support a capital tax cut?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1278-1295, June.

    More about this item

    Keywords

    Inequality; Optimal taxation; Redistribution;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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