Pareto-improving optimal capital and labor taxes

Citation

  • Greulich K, Laczó S, Marcet A. Pareto-improving optimal capital and labor taxes. Journal of political economy. 2023 Jul;131(7):1904-46. DOI: 10.1086/723635

Permanent Link

Description

  • Abstract

    We study optimal Pareto-improving factor taxation when agents are heterogeneous in their labor productivity and wealth and markets are complete. Pareto-improving policies require a gradual reform: labor taxes should be cut, and capital taxes should remain high for along time before reaching the limit. This policy redistributes wealth in favor of workers, promotes growth, and causes early deficits and government debt in the long run. We address several technical issues, such as sufficiency of Lagrangian solutions in a Ramsey problem, their relation to welfare functions, and solution algorithms. We also provide a proof that long-run capital taxes are zero.
  • Description

    Supplementary materials files: online appendix; replication data.
  • Full item page