Use It or Lose It: Efficiency Gains from Wealth Taxation (with Fatih Guvenen, Gueorgui Kambourov, Ser gio Ocampo-Diaz and Daphne Chenk)
Abstract:
This paper studies the quantitative implications of wealt
h taxation (tax on the stock of wealth) as opposed to capital income taxati
on (tax on the income flow from capital) in an overlapping-generations inco
mplete-markets model with rate of return heterogeneity across individuals.
With such heterogeneity, capital income and wealth taxes have opposite impl
ications for efficiency and some key distributional outcomes. Under capital
income taxation, entrepreneurs who are more productive, and therefore gene
rate more income, pay higher taxes. Under wealth taxation, on the other han
d, entrepreneurs who have similar wealth levels pay similar taxes regardles
s of their productivity, which expands the base and shifts the tax burden t
oward unproductive entrepreneurs. This reallocation increases aggregate pro
ductivity and output. In the simulated model calibrated to the US data, a r
evenue-neutral tax reform that replaces capital income tax with a wealth ta
x raises welfare by about 8% in consumption-equivalent terms. Moving on to
optimal taxation, the optimal wealth tax is positive, yields even larger we
lfare gains than the tax reform, and is preferable to optimal capital incom
e taxes. Interestingly, optimal wealth taxes result in more even consumptio
n and leisure distributions (despite the wealth distribution becoming more
dispersed), which is the opposite of what optimal capital income taxes impl
y. Consequently, wealth taxes can yield both efficiency and distributional
gains.