Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108652
Authors: 
Kabukçuoğlu, Ayşe
Year of Publication: 
2014
Series/Report no.: 
Koç University-TÜSİAD Economic Research Forum Working Paper Series 1418
Abstract: 
I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneous-agent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Post-tax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky.
Subjects: 
Heterogeneous agents and incomplete markets
taxation
financial integration
JEL: 
E62
F41
D52
F68
Document Type: 
Working Paper

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