Public Economics by Burkhard Heer

Author:Burkhard Heer
Language: eng
Format: epub
ISBN: 9783030009892
Publisher: Springer International Publishing

It is easy to show34 that it is also optimal to set a wealth tax τ V equal to zero. With a wealth tax, the budget constraint is represented by

(5.25)

Again, one can show that in steady state, the effects of a capital income tax and a wealth tax are identical if the rates satisfy

In the US economy, capital income taxes averaged 41% during the period 1948–2008, although they have declined in recent decades. The Chamley-Judd result suggests that it is optimal to substantially reduce capital income taxation. In our computation exercise, we find that considerable welfare effects equal to multiple percentage points of total consumption accrue in the long run. Thus, what might keep politicians from decreasing capital income taxes? Besides political arguments, are there any economic arguments in favor of capital income taxes?

To derive their results, Chamley (1986) and Judd (1985) analyze a representative agent model. If, instead, households are heterogeneous, capital income taxes may help to redistribute from wealth-rich households, which are characterized by a low marginal utility of consumption, to wealth-poor households, which have a much higher marginal utility of consumption. Consequently, average utility may increase.

In addition, Chamley (1986) and Judd (1985) assume that households are infinitely lived. If one considers a finite lifetime and overlapping generations, the older households may leave bequests to their children in the form of both human and physical capital. To ensure equality of opportunity and allow a household with poor parents (but, perhaps, with high learning abilities and intelligence) to invest in education, it may be welfare-improving to tax inheritances and redistribute among the young generation by providing better public education.

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