Budget-neutral capital tax cuts

Frédéric Dufourt (1) , Lisa Kerdelhué (1) , Océane Piétri (1)

1 AMSE - Aix-Marseille Sciences Economiques

We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balancedbudget constraint. By contrast with its non-budget neutral equivalent-associated with a constant tax rate over time and a permanent increase in the level of public debt-we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.

Mots clés: Fiscal Policy; Capital Tax Cut; Tax Composition; Heterogeneous Agents; Wealth Redistribution

Domaines: Economies et finances

Frédéric Dufourt, Lisa Kerdelhué, Océane Piétri. Budget-neutral capital tax cuts. 2021. ⟨halshs-03424147⟩