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Use It or Lose It: Efficiency Gains from Wealth Taxation

Author

Listed:
  • Sergio Ocampo

    (University of Minnesota)

  • Gueorgui Kambourov

    (University of Toronto)

  • Daphne Chen

    (Florida State University)

  • Burhanettin Kuruscu

    (University of Toronto)

  • Fatih Guvenen

    (University of Minnesota)

Abstract

This paper studies the quantitative implications of wealth taxation (as opposed to capital income taxation) in an incomplete markets model with return rate heterogeneity across individuals. The rate of return heterogeneity arises from the fact that some individuals have better entrepreneurial skills than others, allowing them to obtain a higher return on their wealth. With such heterogeneity, capital income and wealth taxes have different efficiency and distributional implications. Under capital income taxation, entrepreneurs who are more productive and, as a result, generate more income pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity. Thus, in this environment, the tax burden shifts from productive entrepreneurs to unproductive ones if the capital income tax were replaced with a wealth tax. This reallocation increases aggregate productivity. Second, and at the same time, it increases wealth inequality in the population. To provide a quantitative assessment of these different effects, we build and simulate an overlapping generations model with individual-specific returns on capital income and with idiosyncratic shocks to labor income. Our results indicate that switching from a capital income tax to a wealth tax increases welfare by almost 8% through better allocation of capital. We also study optimal taxation in this environment and find that, relative to the benchmark, the optimal wealth tax increases welfare by 9.6% while the optimal capital income tax increases it by 6.3%.

Suggested Citation

  • Sergio Ocampo & Gueorgui Kambourov & Daphne Chen & Burhanettin Kuruscu & Fatih Guvenen, 2017. "Use It or Lose It: Efficiency Gains from Wealth Taxation," 2017 Meeting Papers 913, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:913
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    References listed on IDEAS

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    Cited by:

    1. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    2. Atif R. Mian & Ludwig Straub & Amir Sufi, 2020. "Indebted Demand," NBER Working Papers 26940, National Bureau of Economic Research, Inc.
    3. Baris Kaymak & CHEUK SHING LEUNG & Markus Poschke, 2018. "Accounting for the determinants of wealth concentration in the US," 2018 Meeting Papers 911, Society for Economic Dynamics.
    4. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," IZA Discussion Papers 11475, Institute of Labor Economics (IZA).
    5. Florian Scheuer & Joel Slemrod, 2019. "Taxation and the Superrich," CESifo Working Paper Series 7817, CESifo.
    6. Juan Carlos Conesa & Bo Li & Qian Li, 2020. "Universal Basic Income and Progressive Consumption Taxes," Department of Economics Working Papers 20-01, Stony Brook University, Department of Economics.
    7. Sergio Salgado, 2019. "Technical Change and Entrepreneurship," 2019 Meeting Papers 634, Society for Economic Dynamics.
    8. Elin Halvorsen & Thor Olav Thoresen, 2017. "Distributional Effects of the Wealth Tax under a Lifetime-Dynastic Income Concept," CESifo Working Paper Series 6614, CESifo.
    9. Matthias Krapf, 2018. "The Joint Distribution of Wealth and Income Risk: Evidence from Bern," CESifo Working Paper Series 7130, CESifo.
    10. Bjerksund, Petter & Schjelderup, Guttorm, 2019. "Does a Wealth Tax Discriminate against Domestic Investors?," Discussion Papers 2019/16, Norwegian School of Economics, Department of Business and Management Science.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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