Dynamic Tax Incidence with Heterogeneous Households

This paper examines the utility gains and losses induced by changes in capital taxation in an economy with heterogeneous discount factors. A Ramsey equilibrium, where households earn wage income and accumulate capital, but may not borrow against future wage income, provides a natural setting for this analysis. In the short run, the agents with little or no capital gain from increased transfers following an increase in taxation. In the long run, everyone loses as the capital stock declines. The households with little or no capital are poor because they are relatively impatient. As a result, they prefer to get the short-run gains from taxation, in spite of the long-run (and thus heavily discounted) losses.