Working Paper: NBER ID: w25126
Authors: Linus Mattauch; David Klenert; Joseph E. Stiglitz; Ottmar Edenhofer
Abstract: Wealth inequality is rising in rich countries. Capital taxation used simply to finance redistribution may not be able to counteract this trend, but can increased public investment financed by higher capital taxes? We examine how such a policy affects the distribution of wealth in a setting with distinct wealth groups: dynastic savers and life-cycle savers. Our main finding is that public investment financed through capital taxes always decreases wealth inequality when the elasticity of substitution between capital and labor is moderately high. Indeed, for all elasticities of substitution greater than a threshold value, at high enough capital tax rates, dynastic savers disappear in the long run. Below these rates, both types of households co-exist in equilibrium with life-cycle savers gaining from the higher capital tax rates. These results are robust with respect to the different roles of public investment in production. We calibrate our model to OECD economies and find the threshold elasticity to be 0.82.
Keywords: wealth inequality; capital taxation; public investment
JEL Codes: D31; E21; H31; H41; H54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital taxation (H24) | wealth inequality reduction (D31) |
| high capital tax rates (F38) | disappearance of dynastic savers (D14) |
| disappearance of dynastic savers (D14) | long-term equilibrium with lifecycle savers (D15) |
| long-term equilibrium with lifecycle savers (D15) | wealth inequality reduction (D31) |
| elasticity of substitution > threshold value (D46) | dynamics of wealth distribution shift (D31) |
| higher capital tax rates (F38) | benefits to lifecycle savers (D15) |