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Who should bear the burden of COVID-19 related ï¬ scal pressure? An optimal income taxation perspective

Author

Listed:
  • Sachs, Dominik
  • Ayaz, Mehmet
  • Fricke, Lea
  • Fuest, Clemens

Abstract

The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase ï¬ scal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to ï¬ ve European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in ï¬ scal pressure. For all countries, we ï¬ nd that the increase in ï¬ scal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

Suggested Citation

  • Sachs, Dominik & Ayaz, Mehmet & Fricke, Lea & Fuest, Clemens, 2021. "Who should bear the burden of COVID-19 related ï¬ scal pressure? An optimal income taxation perspective," CEPR Discussion Papers 16713, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16713
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    More about this item

    Keywords

    Fiscal pressure; Optimal taxation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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