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Taxing Sudden Capital Income Surges

Author

Listed:
  • Wei Cui

    (University College London)

  • Jianjun Miao

    (Zhejiang University)

Abstract

We study the impact of flat and progressive capital taxes in a continuous-time heterogeneous-agent incomplete markets model with sudden surges in capital income. We find that simple flat taxes on all capital income can increase wealth inequality relative to labor income inequality. But progressive taxes by taxing sudden surges at a higher rate can reduce wealth inequality and cause less distortion than flat taxation, provided that the government uses tax revenues to finance more public debt as liquidity for precautionary saving.

Suggested Citation

  • Wei Cui & Jianjun Miao, 2025. "Taxing Sudden Capital Income Surges," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(3), pages 779-818, September.
    • Handle: RePEc:pal:imfecr:v:73:y:2025:i:3:d:10.1057_s41308-025-00280-3
    DOI: 10.1057/s41308-025-00280-3
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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