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The Distributional Consequences of Supply-Side Reforms in General Equilibrium

  • Angelopoulos, Konstantinos
  • Fernandez, Bernardo X.
  • Malley, James R.

This paper addresses the issue on whether tax reforms consisten with lower public debt-to-GDP in the long-run can lead to a more efficient and equitable economy. To this end we solve a heterogeneous agent model comprised of a government, a representative capitalist and representative skilled and unskilled workers, under both rational expectations and adaptive learning. Our main ndings are that (i) reductions in capital taxation, while bene cial at the aggregate level, lead to increased inequality mainly due to the substitutability of un- skilled labour and capital; (ii) a fall in taxation for skilled labour is Pareto improving, which is largely explained by its complementarity with the other factor inputs; (iii) all agents would prefer increasing the tax rate on capital to increasing the tax rate on skilled and un- skilled labour since it leads to relatively lower welfare losses; and (iv) heterogeneity in initial beliefs under adaptive learning quantitatively matters for welfare.

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File URL: http://hdl.handle.net/10943/216
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-85.

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Date of creation: 2010
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Handle: RePEc:edn:sirdps:216
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