Working Paper: CEPR ID: DP16713
Authors: Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
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. 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.
Keywords: Fiscal pressure; Optimal taxation
JEL Codes: H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in fiscal pressure (E62) | less progressive optimal tax schedule (H21) |
| increase in fiscal pressure (E62) | higher marginal tax rates for lower incomes (H31) |
| increase in fiscal pressure (E62) | regressive change in average tax rates (H23) |
| higher marginal tax rates for lower incomes (H31) | shift towards U-shaped tax schedule (H31) |
| not adjusting lump-sum transfers (F16) | more regressive change in marginal tax rates (H29) |