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 Sep 2017
DOIs
Publication statusPublished - 30 Sep 2019

Keywords

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

ASJC Scopus subject areas

  • Economics and Econometrics

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