2004/04/19 by David Domeij, Jonathan Heathcote
Economics, Econometrics and Finance · Social Sciences · Business, Management and Accounting · #Fiscal Policy and Economic Growth #Gender, Labor, and Family Dynamics #Financial Literacy, Pension, Retirement Analysis
paper · doi:10.1111/j.1468-2354.2004.00135.x
This article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes. We compare a representative‐agent economy to an economy in which households face idiosyncratic uninsurable income risk. The income process is consistent with empirical estimates and implies a realistic wealth distribution. We find that capital tax cuts imply large welfare gains in the representative‐agent economy. However, when households are heterogeneous, substantial redistribution during transition means that only a minority will support capital tax cuts, whereas most households can expect large welfare losses.