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Joint S.C. Tsiang Macroeconomics Workshop and Public Economics Workshop: Fatih Guvenen

Thursday, November 4, 2021 at 11:15am to 12:45pm

Virtual Event

Fatih Guvenen, University of Minnesota

Use It or Lose It:  Efficiency Gains from Wealth Taxation (joint w/Gueorgui Kambourov, Burhan Kuruscu, Daphne Chen and Sergio Ocampo)

Abstract:  How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.

Dial-In Information

If you are interested participating in this seminar, please email Ulrike Kroeller at uab1@cornell.edu for Zoom information.

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Event Type

Seminar, Class/ Workshop

Departments

Economics

Tags

economics, EconSeminar, EconMacro, EconPublic

Contact E-Mail

uab1@cornell.edu

Contact Name

Ulrike Kroeller

Contact Phone

6072554254

Speaker

Fatih Guvenen

Speaker Affiliation

University of Minnesota

Open To

Cornell Economics Commnity (List Service Mambers)