Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/235366 
Authors: 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 8996
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
Wealthier households obtain higher returns on their investments than poorer ones. How should the tax system account for this return inequality? I study capital taxation in an economy in which return rates endogenously correlate with wealth. The leading example is a financial market, where the rich acquire more financial information than the poor. Contrary to conventional wisdom, rather than calling for more redistribution, the presence of this scale dependence provides a rationale for lower marginal tax rates. The endogeneity of returns generates an inequality multiplier effect between wealth and its returns. Therefore, standard elasticity measures that determine the responsiveness of capital to taxes must be revised upwards. At an aggregate level, a rise in redistribution induces a compression effect on the distribution of pre-tax returns. In the financial market, I identify general equilibrium trickle-up externalities that provide a force for more redistribution relative to the partial equilibrium. Finally, I estimate partial and general equilibrium responses and demonstrate the quantitative importance of scale dependence for tax policy.
Subjects: 
optimal taxation
capital taxation
heterogeneous returns
wealth inequality
general equilibrium
asset pricing
private information
financial literacy
JEL: 
H21
H23
H24
D31
G11
G12
G14
G53
Document Type: 
Working Paper
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