The Distributional Consequences of Tax Reforms Under Capital-Skill Complementarity

Angelopoulos, K. , Fernandez, B.X. and Malley, J. (2011) The Distributional Consequences of Tax Reforms Under Capital-Skill Complementarity. Working Paper. CESifo Group, Munich, Germany.

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This paper analyses wage inequality and the welfare e¤ects of changes in capital and labour income tax rates for di¤erent types of agents. To achieve this, we develop a model that allows for capital-skill complementarity given non-uniform distributions of asset holdings and labour skills. While the literature has allowed for joint equality in asset holdings and labour productivity when evaluating capital taxes, our main interest is on the importance of capital-skill complementarity under such joint distributions. This allows us to examine the post- reform evolution of wage inequality that is driven by an endogenous skill premium, and evaluate its contribution in determining the overall inequality e¤ects of tax reform. We and that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the in-equality e¤ects of capital tax reductions are lower over the transition period compared with the long-run.

Item Type:Research Reports or Papers (Working Paper)
Additional Information:CESifo Working Paper no. 3504
Glasgow Author(s) Enlighten ID:UNSPECIFIED
Authors: Angelopoulos, K., Fernandez, B.X., and Malley, J.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Publisher:CESifo Group

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Project CodeAward NoProject NamePrincipal InvestigatorFunder's NameFunder RefLead Dept
512541Optimal taxation in heterogeneous agent dynamic general equilibrium models.James MalleyEconomic & Social Research Council (ESRC)ES/H021140/1BUS - ECONOMICS