Redistributive Taxation with Skill Biased Technologies

37 Pages Posted: 9 Feb 2022

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Pietro Reichlin

Luiss Guido Carli University - Department of Economics and Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 3, 2022

Abstract

We study the long run optimal redistributive tax structure on capital and labor in a dynamic model with heterogeneous labor productivities and skill biased technology. Assuming that the planner's actions are restricted by a log-linear (progressive) tax and transfer function of pre-tax labor income and that low skilled households are hand-to-mouth consumers, the optimal long-run capital tax rate is positive and the labor marginal tax rate can be positive or negative, depending on demand elasticities as well as on the impact of capital on the skill premium. A positive capital tax serves the purpose of reducing tax distortions arising from redistribution, and it survives for any parametrization of the log-linear tax scheme except for a fully progressive system. Under a plausible quantitative evaluation, we show that the benefits of the capital tax are relatively small and associated to a regressive labor tax schedule.

Keywords: capital taxation, inequality, skill bias

JEL Classification: E21, E62, H2, H21, G1

Suggested Citation

Borri, Nicola and Reichlin, Pietro, Redistributive Taxation with Skill Biased Technologies (February 3, 2022). Available at SSRN: https://ssrn.com/abstract=4025212 or http://dx.doi.org/10.2139/ssrn.4025212

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Pietro Reichlin

Luiss Guido Carli University - Department of Economics and Finance ( email )

Viale Romania, 32
Rome, 00197
Italy
390685225554 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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