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International Tax and Public Finance

Erschienen in:

22.03.2018

Is capital back? The role of land ownership and savings behavior

verfasst von: Max Franks, David Klenert, Anselm Schultes, Kai Lessmann, Ottmar Edenhofer

Erschienen in: International Tax and Public Finance | Ausgabe 5/2018

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Abstract

Wealth inequality is a major political concern in most OECD countries. Under this premise, we analyze different policy instruments in terms of their impact on wealth inequality and output. In a general equilibrium model, we disaggregate wealth in its capital and land components, and savings in their life-cycle and bequest components. Households are heterogeneous in their taste for leaving bequests. We show that governments have considerable freedom in reducing wealth inequality without sacrificing output: Land rent taxes enhance output due to a portfolio effect and reduce wealth inequality slightly. Bequest taxes have the highest potential to reduce inequality, and their effect on output is moderate. By contrast, we confirm the standard result that capital taxes reduce output strongly and show that they only have moderate redistributive effects. Furthermore, we find that using the tax proceeds for transfers to the young generations enhances output the most and further reduces wealth inequality.

Vorheriger Artikel Distributional and revenue effects of a tax shift from labor to property

Nächster Artikel Tax treaties and foreign direct investment: a network approach

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Although Piketty and Saez (2013) is titled A Theory of Optimal Inheritance Taxation, the tax on bequests which they analyze is equivalent to a capital tax (p. 1854, Footnote 4). Accordingly, the title of their working paper version Piketty and Saez (2012) is A Theory of Optimal Capital Taxation.

Recently, Straub and Werning (2014) have called the zero-capital-tax result of Judd (1985) and Chamley (1986) into question. However, Straub and Werning rely on the assumption that consumption taxes are not available—their model thus constitutes an “extreme example of an incomplete set of fiscal instruments” as Chari, Nicolini, and Teles, point out in their manuscript More on the taxation of capital.

In contrast to Stiglitz (2016), Homburg (2015) seems to dismiss the distributional implications of the dynamics of land rent ownership in the conclusion of his article.

Feldstein (1977) was the first to identify the portfolio effect, which Mountford (2004) and Petrucci (2006) further formalized. Edenhofer et al. (2015) extended the analysis of the portfolio effect by introducing a social welfare function as a normative benchmark for evaluating fiscal policy, in particular land rent taxes. The present paper, in contrast, takes a positive approach and focuses on the economic impacts of fiscal policy. Hence, we do not consider a social welfare function. Nevertheless, we find that under land rent taxation the winners of the policy could theoretically compensate the losers. Thus, land rent taxation fulfills the Kaldor–Hicks criterion (see Appendix C).

For a discussion of the transmission of tastes from one generation to the next, see for example de la Croix and Michel (2002) and Black et al. (2015). Both publications provide evidence suggesting that our simplifying assumption is justified as a first-order approximation.

We shall make use of the convention that all households choose the same asset composition. More precisely, in every period t there is an \(X_t > 0\) such that \(X_t = k^s_{i,t}/l_{i,t}\) for all \(i \in \{1,\ldots ,N\}\). We use this convention because there is an infinite continuum of possible combinations of individual asset portfolio compositions of each household i that have no bearing on any of our results.

For example, the analytical method applied by Mountford (2004) to a dynamic system with two state variables already leads to inconclusive results if the number of states is increased by one dimension (i.e. bequests are added to his model) and households are still assumed to be homogeneous.

Similar to Davies (1986), we can thus separate two different effects of taxation: We first analyze only the distorting effect of different taxes on households’ investment behavior, and do not take into account the effect caused by the redistribution of the tax revenues to the households as transfers. Only in the second step we also consider the impact of the government’s transfers. In contrast to Davies (1986), however, we always allow for general equilibrium effects.

In Sect. 3.2, we will discuss conditions under which capital income and bequest taxes may increase inequality.

Recall that the results we obtain are independent of whether labor supply is fixed or endogenous. Thus, we abstract from a labor-leisure choice here, to keep the analysis as tractable as possible.

This can be made plausible by recalling Fig. 1. Compare the set of coordinates in the policy option space that can be reached with the land rent tax alone—the green curve with circles marking the data points—with the coordinates in the policy option space that can be reached with the bequest tax—the blue curve with triangles as data points. When implementing a mix of both taxes it is likely that the coordinates that can be thus reached lie between the green (circles) and the blue (triangles) curve.

The difference of 0.13 is a little bit less than the difference between the wealth distributions of the USA (with 0.93, the highest inequality within the sample given by OECD 2015), and France or Finland (both 0.77). The difference of 0.13 corresponds to the difference between the Slovak Republic (with 0.52, the most equal country in the sample), and Greece (0.65). The Gini coefficients of all countries for which OECD (2015) reports wealth distributions are given in Table 6 in Appendix B.

Here, we use \(\delta = \frac{1}{2}\). In general, of course, any \(0<\delta <1\) implies transfers to both.

See Appendix B, Fig. 6 for a graphical exposition of this fact.

As discussed in Sect. 3.1.1, the main channel through which tax reforms change the wealth distribution in our model is the difference in income composition, i.e. the ratio of bequests to wages in total income.

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Titel: Is capital back? The role of land ownership and savings behavior
verfasst von: Max Franks
David Klenert
Anselm Schultes
Kai Lessmann
Ottmar Edenhofer
Publikationsdatum: 22.03.2018
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 5/2018
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-018-9486-3

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