A Tale of Two Bases: Progressive Taxation of Capital and Labor Income

51 Pages Posted: 3 May 2019 Last revised: 18 Sep 2020

See all articles by Rachel Moore

Rachel Moore

Government of the United States of America - Joint Committee on Taxation

Brandon Pecoraro

Government of the United States of America - Joint Committee on Taxation

Date Written: September 10, 2020

Abstract

Macroeconomic models routinely abstract from two features of the US federal tax code: the joint taxation of ordinary capital and labor income, and the special taxation of preferential capital income. In this paper we argue that this abstraction omits a `portfolio-effect' mechanism where endogenous changes to the ordinary-preferential composition of households' capital income influence individuals' optimal labor and saving decisions through its impact on their effective marginal tax rates. We demonstrate the quantitative importance of this tax detail by simulating provisions from the recently enacted “Tax Cuts and Jobs Act” using a heterogeneous-agent overlapping generations framework with two production sectors.

Keywords: dynamic scoring, progressive income taxation, modeling tax reform, heterogeneous agents, tax calculator

JEL Classification: C63, E62, H30

Suggested Citation

Moore, Rachel and Pecoraro, Brandon, A Tale of Two Bases: Progressive Taxation of Capital and Labor Income (September 10, 2020). Available at SSRN: https://ssrn.com/abstract=3367192 or http://dx.doi.org/10.2139/ssrn.3367192

Rachel Moore

Government of the United States of America - Joint Committee on Taxation

Room 1625 Longworth House Office Building
Washington, DC 20515
United States

Brandon Pecoraro (Contact Author)

Government of the United States of America - Joint Committee on Taxation ( email )

Room 1625 Longworth House Office Building
Washington, DC 20515
United States

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