Work in progress
How should we tax capital? Interaction between capital taxes and saving motives.
Abstract: This paper examines the implications of capital income taxes and wealth taxes by distinguishing between two asset classes: one yielding greater financial returns and the other providing flow utility. Theoretical analysis reveals that both tax policies discourage saving and distort individuals' portfolio compositions. Optimal tax policies vary based on heterogeneity in time preference and non-monetary valuations of assets among households. Using numerical analysis calibrated to the U.S. economy, the paper identifies the optimal tax mix, suggesting a wealth subsidy aimed at benefiting low-income households more due to preference heterogeneity, coupled with an increase in capital income taxes to finance it.
Joint taxation of income and wealth. (with Dominik Sachs)
Abstract: We study the integration of income and wealth taxation, exploring efficiency gains and social implications. Utilizing a two-period model, we uncover the efficiency benefits of conditioning wealth taxation on income. Our theoretical examination of elementary joint tax reforms highlights tagging benefits, leveraging wealth as a tag for income taxation to improve efficiency. However, this approach also introduces distortion costs, impacting wealth accumulation decisions. Our numerical analysis based on U.S. data reveals that joint tax reforms may reduce the marginal excess burden compared to standalone income and wealth tax reforms, their effectiveness varies based on the income-wealth correlation. Importantly, joint tax reforms can enhance social welfare even beyond the capabilities of income and wealth tax reforms.
Publications
Who should bear the burden of COVID-19 related fiscal pressure? An optimal income taxation perspective. (with Lea Fricke, Clemens Fuest, and Dominik Sachs). 2023. European Economic Review, 153: 104381.
Abstract: The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase in fiscal pressure. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre-COVID-19 economies, we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.