Redistributive Taxation with Skill Biased Technologies

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