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Tax reform with endogenous borrowing limits and incomplete asset markets

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dc.contributor.author Ábrahám, Árpád
dc.contributor.author Cárceles Poveda, Eva
dc.date.accessioned 2016-09-15T12:15:25Z
dc.date.available 2016-09-15T12:15:25Z
dc.date.issued 2016-06
dc.identifier.citation Abrahám A, Carceles Poveda E. Tax reform with endogenous borrowing limits and incomplete asset markets. 2016
dc.identifier.uri http://hdl.handle.net/10230/27285
dc.description.abstract This paper studies different income tax reforms in an infinite horizon economy with a progressive labor income tax code, incomplete markets and endogenous borrowing constraints on asset holdings. The endogenous limits are determined at the level at which households are indifferent between defaulting and paying back their un-secured debt. The reforms we study area all revenue neutral and they eliminate capital income taxes but they differ in the changes to the labor income tax code. Our results illustrate that a successful reform has to combine the elimination of capital income taxes with an increase in the progressivity of the labor income tax code. On the one hand, this reduces the disposable income of the rich, leading to lower savings and to a lower aggregate capital. On the other hand, it allows the middle income households to save more at a higher after tax interest rate and the low income households to borrow more on a lower interest rate. This increases welfare both in the long run and throughout the transition. The welfare gains are hence obtained not through more capital accumulation but by reducing wealth and consequently consumption inequality.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Ademu Working Papers Series; 13
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri http://creativecommons.org/licenses/by/4.0/es/
dc.title Tax reform with endogenous borrowing limits and incomplete asset markets
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Tax reform
dc.subject.keyword Endogenous borrowing constraints
dc.subject.keyword Incomplete markets
dc.subject.keyword Wealth inequality
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess
dc.type.version info:eu-repo/semantics/publishedVersion

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