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On The Distributional Effects Of Reducing Capital Taxes

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  • David Domeij
  • Jonathan Heathcote
Abstract
This article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes. We compare a representative-agent economy to an economy in which households face idiosyncratic uninsurable income risk. The income process is consistent with empirical estimates and implies a realistic wealth distribution. We find that capital tax cuts imply large welfare gains in the representative-agent economy. However, when households are heterogeneous, substantial redistribution during transition means that only a minority will support capital tax cuts, whereas most households can expect large welfare losses. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, May.
    • Handle: RePEc:ier:iecrev:v:45:y:2004:i:2:p:523-554
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