Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89780
Authors: 
Angelopoulos, Konstantinos
Asimakopoulos, Stylianos
Malley, Jim
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4468
Abstract: 
This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is de-veloped to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least counter-cyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.
Subjects: 
optimal taxation
business cycle
skill premium
income distribution
JEL: 
E24
E32
E62
Document Type: 
Working Paper

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