CFCM 14/17: The optimal distribution of the tax burden over the business cycle

Abstract

This paper analyses optimal income taxation over the business cycle for households differentiated by labour skill, income and wealth. A model incorporating capital-skill complementarity in production and differential access to labour and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We first find that, under a fully flexible budget, the income taxation burden over the business cycle is spread roughly equally across the high-, middle- and low-income households. However, under a balanced budget restriction, the burden is distributed least favourably to the middle-income and most favourably to the high income households.

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Authors

Konstantinos Angelopoulos, Stylianos Asimakopoulos and James Malley

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