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Optimal Taxation of Capital in the Presence of Declining Labor Share

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  • Orhan Erem Atesagaoglu
  • Hakki Yazici

Abstract

We analyze the implications of the decline in labor’s share in national income for optimal Ramsey taxation. It is optimal to accompany the decline in labor share by raising capital taxes only if the labor share is falling because of a decline in competition or other mechanisms that raise the share of pure profits. This result holds under various alternative institutional arrangements that are relevant for optimal taxation of capital income. A quantitative application to the U.S. economy shows that soaring profit shares since the 1980's can justify a significantly increasing path of capital income taxes.

Suggested Citation

  • Orhan Erem Atesagaoglu & Hakki Yazici, 2021. "Optimal Taxation of Capital in the Presence of Declining Labor Share," CESifo Working Paper Series 9101, CESifo.
    • Handle: RePEc:ces:ceswps:_9101
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    Cited by:

    1. Jan Eeckhout & Chunyang Fu & Wenjian Li & Xi Weng, 2021. "Optimal taxation and market power," Economics Working Papers 1777, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Dami'an Vergara, 2022. "Minimum Wages and Optimal Redistribution," Papers 2202.00839, arXiv.org, revised Dec 2022.
    3. Nakatani, Ryota, 2022. "Optimal fiscal policy in the automated economy," MPRA Paper 115003, University Library of Munich, Germany.

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    More about this item

    Keywords

    capital income tax; labor share; profit share; market power;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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