Macroeconomic Effects of Capital Tax Rate Changes

We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate quantitative model with capital-skill complementarity household heterogeneity. Such reform leads to expansionary long-run aggregate output investment effects, but those are coupled increases wage, consumption, income inequality. The is not self-financing its depend crucially on whether government cuts lump-sum transfers or raises distortionary labor consumption rates for financing. former results larger expansion, at expense greater rise As result, latter relatively more beneficial unskilled households. find that reform, when adjusts, Pareto improvement terms life-time welfare. For transition dynamics, monetary policy, addition fiscal adjustments, matters. In particular, if policy inflates away portion public debt, economy can avoid short-run contraction would arise otherwise.