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On the Distributional Effects of Reducing Capital Taxes (previously: Factor Taxation with Heterogeneous Agents)

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Author Info
Jonathan Heathcote () (Department of Economics, Georgetown University)

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Abstract

We investigate the welfare implications of changing the mix between capital and labor taxes for a model economy in which heterogeneous households face uninsurable labor income risk. The stochastic process for labor earnings we construct 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 eliminating capital taxes. This finding is interesting in light of the fact that this reform would be optimal if we abstracted from heterogeneity and assumed a representative agent. A second finding is that a utilitarian government prefers the current calibrated U.S. capital income tax rate (39.7 percent) to any increase or decrease in the capital tax rate.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-22.

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Date of creation: 03 Sep 2003
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Handle: RePEc:geo:guwopa:gueconwpa~03-03-22

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
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Related research
Keywords: Factor taxation; Redistribution; Heterogeneous agents;

Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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