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Journal Articles Annals of Economics and Statistics Year : 2022

Budget-Neutral Capital Tax Cuts

Abstract

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) balanced-budget 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.
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Dates and versions

hal-04000531 , version 1 (22-02-2023)

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Frédéric Dufourt, Lisa Kerdelhué, Océane Piétri. Budget-Neutral Capital Tax Cuts. Annals of Economics and Statistics, 2022, 146, pp.93-122. ⟨10.2307/48674140⟩. ⟨hal-04000531⟩
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