Abstract
We analyze the implications of the decline in labor’s share in national income for optimal Ramsey taxation. It is optimal to accompany the decline in labor share by raising capital taxes only if the labor share is falling because of a decline in competition or other mechanisms that raise the share of pure profits. This result holds under various alternative institutional arrangements that are relevant for optimal taxation of capital income. A quantitative application to the U.S. economy shows that soaring profit shares since the 1980's can justify a significantly increasing path of capital income taxes.
| Original language | English |
|---|---|
| Pages (from-to) | 1079-1097 |
| Number of pages | 19 |
| Journal | International Economic Review |
| Volume | 66 |
| Issue number | 3 |
| Early online date | 31 Mar 2025 |
| DOIs | |
| Publication status | E-pub ahead of print - 31 Mar 2025 |
Bibliographical note
Publisher Copyright:© 2025 The Author(s). International Economic Review published by Wiley Periodicals LLC on behalf of The Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.