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Pareto-Improving Optimal Capital and Labor Taxes

Greulich, K, Laczo, S and Marcet, A (2016) Pareto-Improving Optimal Capital and Labor Taxes [Working Paper]

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Abstract

We study Pareto-optimal scal policy in a model with agents who are heterogeneous in their labor productivity and wealth. We show a natural modi cation of the standard Ramsey problem to guarantee that long-run capital taxes are zero. We focus on Paretoimproving policies and we nd that a gradual reform is crucial in achieving a Pareto improvement: labor taxes should be cut and capital taxes should remain high for a very long time before reaching zero. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. This policy redistributes wealth in favor of workers so that all agents bene t, and it favors quick capital growth after the reform. The labor tax cut is nanced by de cits which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare bene ts from the tax reform are relatively large and they can be shifted entirely to capitalists or workers by varying the length of the transition. We address a number of technical issues such as su ciency of Lagrangian solutions in a Ramsey problem, relation of Pareto-improving allocations with welfare functions, asymptotic behavior, and solution algorithms.

Item Type: Working Paper
Subjects : Economics
Authors :
NameEmailORCID
Greulich, KUNSPECIFIEDUNSPECIFIED
Laczo, Ss.laczo@surrey.ac.ukUNSPECIFIED
Marcet, AUNSPECIFIEDUNSPECIFIED
Date : March 2016
Uncontrolled Keywords : Fiscal policy, Pareto-improving tax reform, Redistribution
Related URLs :
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:39
Last Modified : 18 May 2017 13:14
URI: http://epubs.surrey.ac.uk/id/eprint/821090

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