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Why Are Capital Income Taxes So High?

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  • Flodén, 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6366.

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Date of creation: Jun 2007
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Handle: RePEc:cpr:ceprdp:6366

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Keywords: inequality; optimal taxation; redistribution;

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Cited by:
  1. 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.
  2. Katharina Greulich & Albert Marcet, 2008. "Pareto-Improving Optimal Capital and Labor Taxes," Working Papers 337, Barcelona Graduate School of Economics.
  3. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.

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