Macroeconomic Effects of Capital Tax Rate Changes

86 Pages Posted: 14 May 2019

See all articles by Saroj Bhattarai

Saroj Bhattarai

University of Texas at Austin - Department of Economics

Woong Yong Park

Seoul National University

Jae Won Lee

University of Virginia - Department of Economics

Choongryul Yang

University of Texas at Austin

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a dynamic equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in the skill premium. Moreover, the expansionary long-run aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut. An extension to a model with heterogeneous households shows that consumption inequality increases in the long-run. We study transition dynamics and show that short-run effects depend critically on the monetary policy response: whether the central bank allows inflation to directly facilitate government debt stabilization and how inertially it raises interest rates. Finally, we contrast the long-term aggregate welfare gains with short-term losses, as well as in the model with heterogeneous households, show that welfare gains for the skilled go together with welfare losses for the unskilled.

Keywords: capital tax rate, permanent change in the tax rate, capital-skill complementarity, skill premium, inequality, transition dynamics, monetary policy response

JEL Classification: E620, E630, E520, E580, E310

Suggested Citation

Bhattarai, Saroj and Park, Woong Yong and Lee, Jae Won and Yang, Choongryul, Macroeconomic Effects of Capital Tax Rate Changes (2019). CESifo Working Paper No. 7630, Available at SSRN: https://ssrn.com/abstract=3387666

Saroj Bhattarai (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Woong Yong Park

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Jae Won Lee

University of Virginia - Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
Charlottesville, VA 22904-418
United States

Choongryul Yang

University of Texas at Austin ( email )

2225 Speedway
BRB 1.116, C3100
Austin, TX 78712
United States

HOME PAGE: http://https://choongryulyang.github.io

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