The optimal distribution of the tax burden over the business cycle

Konstantinos Angelopoulos, Stylianos Asimakopoulos, James Malley

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Abstract

This paper analyzes optimal capital and labor income taxation for households differentiated by labor skill, income, and wealth, under a balanced government budget, over the business cycle. A model incorporating capital-skill complementarity in production and differential access to labor and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that optimal taxes for middle-income households are more volatile than the remaining taxes. Moreover, the government re-allocates the total tax burden in bad times so that the share of total tax revenue paid by middle-income households rises. This share also rises for low-income households but by significantly less, whereas the tax share for skilled households falls.

Original languageEnglish
Pages (from-to)2298-2337
Number of pages40
JournalMacroeconomic Dynamics
Volume23
Issue number6
Early online date19 Sept 2017
DOIs
Publication statusPublished - 30 Sept 2019

Bibliographical note

Funding Information:
Angelopoulos Konstantinos Asimakopoulos Stylianos Malley James University of Glasgow and CESifo University of Bath University of Glasgow and CESifo We would like to thank the editor, William Barnett, two anonymous referees, an associate editor, Marco Bassetto, Andrew Clausen, Fabrice Collard, Richard Dennis, Michael Hatcher, Wei Jiang, Matthew Lindquist, Ioana Moldovan, Charles Nolan, Apostolis Philippopoulos, and Fabien Postel-Vinay, participants at the CESifo Macro Area Conference 2015, Royal Economic Society 2014 Annual Conference, the Universities of Kent, Aberdeen and Nottingham for helpful comments and suggestions. We are also grateful for financial support from the ESRC, Grant Nos. RES-062-23-2292 and ES/I902414/1. Address correspondence to: Stylianos Asimakopoulos, Department of Economics , University of Bath , Claverton Down , 3 East 4.24 , Bath BA2 7AY , UK ; e-mail: s.asimakopoulos@bath.ac.uk . 19 09 2017 09 2019 23 6 2298 2337 Copyright © Cambridge University Press 2017  2017 Cambridge University Press This paper analyzes optimal capital and labor income taxation for households differentiated by labor skill, income, and wealth, under a balanced government budget, over the business cycle. A model incorporating capital–skill complementarity in production and differential access to labor and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that optimal taxes for middle-income households are more volatile than the remaining taxes. Moreover, the government re-allocates the total tax burden in bad times so that the share of total tax revenue paid by middle-income households rises. This share also rises for low-income households but by significantly less, whereas the tax share for skilled households falls.

Publisher Copyright:
© 2017 Cambridge University Press.

Keywords

  • Business Cycle
  • Income Distribution
  • Optimal Taxation
  • Skill Premium

ASJC Scopus subject areas

  • Economics and Econometrics

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