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Capital Versus Labor Taxation with Heterogeneous Agents

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  • David Domeij

    (Stockholm School of Economics)

  • Jonathan Heathcote

    (Stockholm School of Economics)

Abstract

We investigate the welfare implications of eliminating a proportional capital income tax for a model economy in which heterogeneous households face labor income risk and trade only one asset. Labor taxes rises at the time of the reform to maintain long run budget balance. Our stochastic process for labor earnings is consistent with empirical estimates of earnings risk, and also implies a distribution of asset holdings across households closely resembling that in the United States. We find that a vast majority of households prefers the status quo to the tax reform. This finding is interesting in light of the fact that our reform would be optimal if we abstracted from heterogeneity and assumed a representative agent. Initial household productivity and initial household wealth are independently important in determining a particular household's expected gain or loss, in contrast to a complete markets economy in which only the ratio of asset to labor income matters.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0834.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0834

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  8. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
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  15. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 2010. "Supply Side Interventions and Redistribution," Economic Journal, Royal Economic Society, vol. 120(543), pages 105-130, 03.
  16. repec:fth:inseep:9811 is not listed on IDEAS
  17. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
  18. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  19. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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Cited by:
  1. T. Kirk White, 2002. "Marginal Tax Rates and the Tax Reform of 1986: the Long-run Effect on the U.S. Wealth Distribution," Macroeconomics 0209002, EconWPA.
  2. Kartik B. Athreya & Andrea L. Waddle, 2007. "Implications of some alternatives to capital income taxation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 31-55.

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