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Optimal Taxation and Investment-Specific Technological Change

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  • Nóbrega, Valter

Abstract

In this paper, we look at the relationship between Investment Specific Technological Change (ISTC) and optimal level of labor income progressivity. We develop an incomplete markets overlapping generations model that matches relevant features of the US economy and find that the observed drop in the relative price of investment since the 1980's leads optimal progressivity to increase. This result hinges on ISTC increasing the wage premium through an increase in the variance of the permanent component of labor income. This result is supported by recent findings in the literature that highlight the increasing role of the permanent component of labor income in the observed increase in income inequality.

Suggested Citation

  • Nóbrega, Valter, 2020. "Optimal Taxation and Investment-Specific Technological Change," MPRA Paper 98917, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:98917
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    References listed on IDEAS

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J0 - Labor and Demographic Economics - - General

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