Redistribution of Return Inequality

Arbeitspapier

Wealthier households obtain higher returns on their investments than poorer ones. How should the tax system account for this return inequality? I study capital taxation in an economy in which return rates endogenously correlate with wealth. The leading example is a financial market, where the rich acquire more financial information than the poor. Contrary to conventional wisdom, rather than calling for more redistribution, the presence of this scale dependence provides a rationale for lower marginal tax rates. The endogeneity of returns generates an inequality multiplier effect between wealth and its returns. Therefore, standard elasticity measures that determine the responsiveness of capital to taxes must be revised upwards. At an aggregate level, a rise in redistribution induces a compression effect on the distribution of pre-tax returns. In the financial market, I identify general equilibrium trickle-up externalities that provide a force for more redistribution relative to the partial equilibrium. Finally, I estimate partial and general equilibrium responses and demonstrate the quantitative importance of scale dependence for tax policy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8996

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes ; Personal Income, Wealth, and Their Distributions ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: optimal taxation ; capital taxation ; heterogeneous returns ; wealth inequality ; general equilibrium ; asset pricing ; private information ; financial literacy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schulz, Karl
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/235366
• Last update: 10.03.2025, 11:44 AM CET