Welfare Effects of Taxation of Income from Capital
Tax Policy Conference, p. 391, 2003
22 Pages Posted: 3 Jun 2012
Date Written: April 3, 2003
Abstract
The paper by Jayasri Dutta, James Sefton and Martin Weale presents an evaluation of the impact of capital income taxation in the United Kingdom. A general equilibrium model with overlapping generations is first set out and then calibrated using the British Household Panel Survey. The model is used to simulate the effects of changes in capital taxation. Simulations show that the tax has the expected effect of reducing aggregate wealth and thus the capital stock and gross domestic product. Moreover, since the model is able to represent the heterogeneity in households (especially by age groups), it allows identifying the households which benefit from a particular tax structure. Simulations show that a tax on capital income raises the consumption level and the income of the young and reduces those of the elderly. Simulations also allow drawing some general considerations regarding the welfare effects of taxing capital income, as has been the case in the UK since the 1930s. The result is that young people are better off in the presence of a capital income tax compared with a situation where capital income is not taxed.
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