Supply Side Interventions and Redistribution

Abstract

In this paper we study the welfare impact of alternative tax schemes on labor and capital. We evaluate the e¤ect of lowering capital income taxes on the distribution of wealth in a model with heterogeneous agents, restricting our attention to policies with constant tax rates. We calibrate and simulate the economy; we find that lowering capital taxes has two effects: i) it increases e¢ciency in terms of aggregate production, and ii) it redis-tributes wealth in favor of those agents with a low wage/wealth ratio. We find that the redistributive e¤ect dominates, and that agents with a high wage/wealth ratio would experience a large loss in utility if capital income taxes were eliminated.