Abstract
Progressive capital income taxation is introduced into a real-business-cycle (RBC) model with fiscal policy. The artificial economy is calibrated to Bulgarian data for the period 1999–2018. The quantitative role of progressive taxation on capital income is investigated in light of its possible stabilization role in Bulgaria over the business cycle. Unfortunately,the quantitative effect of the presence of such a tax turned out to be very small,and thus not important for either business cycle stabilization,or public finance issues.
Highlights
Introduction and MotivationTaxing capital is an old and still a controversial issue among economists, and the literature is inconclusive whether it should be taxed, and how exactly it should be taxed.1 We are not going to take a stance whether capital income should be taxed or not; instead, we take it as a given across the globe
It is believed that capital taxation is the most distortionary tax, as it affects capital accumulation and investment decisions
It can be argued that a cyclical capital income tax, and a progressive capital income tax in particular, may act as a built-in stabilizer for the economy, in the same way a progressive labor income tax could by decreasing demand during expansions, and by increasing demand during downturns
Summary
Taxing capital is an old and still a controversial issue among economists, and the literature is inconclusive whether it should be taxed, and how exactly it should be taxed. We are not going to take a stance whether capital income should be taxed or not; instead, we take it as a given across the globe. We are not going to take a stance whether capital income should be taxed or not; instead, we take it as a given across the globe. What is novel in this paper is the pursuit of the question whether taxing capital income should be done in a progressive- vs a proportional manner, especially in a developing country context. This proposal is taken seriously, and this paper incorporates a progressive capital income tax in an RBC model with government. The paper proceeds to quantitatively evaluate the effect of such a progressive capital income tax as a tool for business cycle stabilization, and the implications for public finances. For reasonable degree of capital income tax progressivity, the quantitative effects in the calibrated.
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