Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198990 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7630
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
capital tax rate
permanent change in the tax rate
capital-skill complementarity
skill premium
inequality
transition dynamics
monetary policy response
JEL: 
E62
E63
E52
E58
E31
Document Type: 
Working Paper
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