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Abstract

The decline of capital taxation is associated with efficiency gains. We show that, when agents are heterogeneous, equity concerns can change the policy recommendation driven by efficiency. Given the empirical evidence on the roots of heterogeneity inside each country, either in developing or developed economies, the elimination of capital taxation would lead always to a decline in inequality and to an increase of welfare of the poorest, in a small open economy acting unilaterally. On the contrary for a group of open economies following the same policy, the opposite occurs: with the elimination of capital taxation inequality worsens and it hurts the poorest of each country. Therefore globalization can be important to support a positive tax on capital.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201020.

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Date of creation: 2010
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Handle: RePEc:ptu:wpaper:w201020

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Find related papers by JEL classification:

• D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
• E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
• F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

This paper has been announced in the following NEP Reports:

• NEP-ALL-2010-11-06 (All new papers)
• NEP-CBA-2010-11-06 (Central Banking)
• NEP-IFN-2010-11-06 (International Finance)
• NEP-PBE-2010-11-06 (Public Economics)

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1. Santiago Budría & Javier Díaz-Giménez, 2007. "Economic inequality in Spain: the european community household panel dataset," Spanish Economic Review, Springer, vol. 9(1), pages 1-38, March.
2. Correia, Isabel H., 1996. "Dynamic optimal taxation in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 691-708, April.
3. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
4. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-94, September.
   
   • Isabel Horta Correia, 2005. "Consumption Taxes and Redistribution," Working Papers w200511, Banco de Portugal, Economics and Research Department.
   • Correia, Maria Isabel Horta, 2005. "Consumption Taxes and Redistribution," CEPR Discussion Papers 5280, C.E.P.R. Discussion Papers.
5. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 1995. "Supply side interventions and redistribution," Economics Working Papers 115, Department of Economics and Business, Universitat Pompeu Fabra.
   
   • 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.

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