Burhan Kuruscu (Toronto), 14.07.2023

When is a wealth tax preferable to a capital income tax? We study this question theoretically in a perpetual youth model with entrepreneurs and workers, in which entrepreneurial firms are subject to idiosyncratic productivity shocks and collateral constraints. We focus on the steady state equilibrium that features heterogeneous returns and misallocation of capital. In this equilibrium, increasing the wealth tax always increases aggregate productivity if and only if entrepreneurial productivity is positively auto-correlated. The gains result from the use-it-or-lose-it effect, which causes a reallocation of capital from entrepreneurs with low productivity to those with high productivity. Furthermore, if the capital income tax is adjusted to balance the government's budget, aggregate capital, output, and wages increase. (...)