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The distributional consequences of tax reforms under market distortions

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  • Konstantinos Angelopoulos
  • James R. Malley
  • Wei Jiang

Abstract

In this paper we examine the importance of imperfect competition in product and labour markets in determining the long-run welfare e¤ects of tax reforms assuming agent heterogeneneity in capital hold- ings. Each of these market failures, independently, results in welfare losses for at least a segment of the population, after a capital tax cut and a concurrent labour tax increase. However, when combined in a realistic calibration to the UK economy, they imply that a capital tax cut will be Pareto improving in the long run. Consistent with the the- ory of second-best, the two distortions in this context work to correct the negative distributional e¤ects of a capital tax cut that each one, on its own, creates.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2011_21.

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Date of creation: Sep 2011
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Handle: RePEc:gla:glaewp:2011_21
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Keywords: market imperfections; heterogeneous agents; unemployment; tax reform.;

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Find related papers by JEL classification:
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing capital? Not a bad idea after all!," CFS Working Paper Series 2006/21, Center for Financial Studies (CFS).
  2. Francesco Daveri & Marco Maffezzoli, . "A numerical approach to fiscal policy, unemployment and growth in Europe," Working Papers 155, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  4. Konstantinos Angelopoulos & James Malley & Apostolis Philippopoulos, 2011. "Time-consistent fiscal policy under heterogeneity: conflicting or common interests?," Working Papers 142, Bank of Greece.
  5. Leith, Campbell & Malley, Jim, 2005. "Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe," European Economic Review, Elsevier, vol. 49(8), pages 2137-2159, November.
  6. Angelopoulos, Konstantinos & Fernandez, Bernardo X. & Malley, James R., 2010. "The Distributional Consequences of Supply-Side Reforms in General Equilibrium," SIRE Discussion Papers 2010-85, Scottish Institute for Research in Economics (SIRE).
  7. Kevin J. Lansing, 1998. "Optimal redistributive capital taxation in a neoclassical growth model," Working Papers in Applied Economic Theory 99-01, Federal Reserve Bank of San Francisco.
  8. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
  9. 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.
  10. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
  11. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
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Cited by:

  1. Konstantinos Angelopoulos & James Malley & Apostolis Philippopoulos, 2013. "Human capital, social mobility and the skill premium," Working Papers 2013_10, Business School - Economics, University of Glasgow.
  2. Konstantinos Angelopoulos & Stylianos Asimakopoulos & Jim Malley, 2013. "The Optimal Distribution of the Tax Burden over the Business Cycle," CESifo Working Paper Series 4468, CESifo Group Munich.

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