The Optimal Distribution of the Tax Burden over the Business Cycle

39 Pages Posted: 26 Nov 2013

See all articles by Konstantinos Angelopoulos

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies

Stylianos Asimakopoulos

Brunel University London

Jim Malley

University of Glasgow - Department of Economics

Date Written: November 25, 2013

Abstract

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour 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 the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least counter-cyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

Keywords: optimal taxation, business cycle, skill premium, income distribution

JEL Classification: E240, E320, E620

Suggested Citation

Angelopoulos, Konstantinos and Asimakopoulos, Stylianos and Malley, Jim, The Optimal Distribution of the Tax Burden over the Business Cycle (November 25, 2013). CESifo Working Paper Series No. 4468, Available at SSRN: https://ssrn.com/abstract=2359374 or http://dx.doi.org/10.2139/ssrn.2359374

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece

Stylianos Asimakopoulos

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
+44 141 330 4617 (Phone)
+44 141 330 4940 (Fax)

HOME PAGE: http://www.gla.ac.uk/economics/malley/

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