The Distributional Consequences of Tax Reforms Under Market Distortions

27 Pages Posted: 6 Oct 2011

See all articles by Konstantinos Angelopoulos

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies

Wei Jiang

University of Glasgow

James R. Malley

University of Glasgow

Date Written: September 30, 2011

Abstract

In this paper we examine the importance of imperfect competition in product and labour markets in determining the long-run welfare effects of tax reforms assuming agent heterogeneity in capital holdings. Each of these market failures, independently, results in welfare losses for at least a segment of the population, after a capital tax cut and a concurrent labour tax increase. However, when combined in a realistic calibration to the UK economy, they imply that a capital tax cut will be Pareto improving in the long run. Consistent with the theory of second-best, the two distortions in this context work to correct the negative distributional effects of a capital tax cut that each one, on its own, creates.

Keywords: market imperfections, heterogeneous agents, unemployment, tax reform

JEL Classification: E240, E620

Suggested Citation

Angelopoulos, Konstantinos and Jiang, Wei and Malley, James R., The Distributional Consequences of Tax Reforms Under Market Distortions (September 30, 2011). CESifo Working Paper Series No. 3600, Available at SSRN: https://ssrn.com/abstract=1939828 or http://dx.doi.org/10.2139/ssrn.1939828

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece

Wei Jiang

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

James R. Malley (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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