SSE/EFI Working Paper Series in Economics and Finance
No 623:
Why Are Capital Income Taxes So High?
Martin Floden ()
Abstract: The Ramsey optimal taxation theory implies that the tax
rate on capital income should be zero in the long run. This result holds
even if the social planner only cares about workers that do not hold
assets, or if the planner only cares about any other group in the economy.
This paper demonstrates that although all households agree that capital
income taxation should be eliminated in the long run, they do not agree on
how to eliminate these taxes. Wealthy households would prefer a reform that
is funded mostly by higher taxes on labor income while households with
little wealth would prefer a reform that is funded mostly by high taxes on
initial wealth. Pareto improving reforms typically exist, but the welfare
gains of such reforms are modest.
Keywords: optimal taxation; inequality; redistribution; (follow links to similar papers)
JEL-Codes: E60; H21; (follow links to similar papers)
22 pages, March 8, 2006
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