Are there welfare gains from taxing old capital

Economics

Speaker:Robert Schwager, ZEW, Mannheim
Date: Wednesday 11 December 2002
Time: 16:15
Location: Room 106 Streatam Court

Further details

(with Thomas Gaube)

Introducing a consumption tax implies a lump sum levy on existing wealth. We argue that this levy does not provide a welfare gain if agents are heterogeneous and compensation schemes satisfy some intuitive restrictions. Specifically we analyse (1) the transition from an income tax to a consumption tax and (2) the comparison between wage and consumption taxation. We find: (1) It is possible to replace the income tax by a consumption tax such that (i) a dynamic (intergenerational) Pareto-improvement is obtained and (ii) only the information available from enforcing the income tax is used if and only if in a static setting the consumption tax induces less distortions than the income tax. (2) While in a representative consumer framework, wage taxation is inferior to consumption taxation, the opposite result may emerge in a model where households are heterogeneous and where a uniform (poll) tax or subsidy is available.
Presentation also based on the paper "Consumption vs. wage taxation and the capital levy".