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Title: Who should bear the burden of COVID-19 related ?scal pressure? An optimal income taxation perspective

Author(s): Mehmet Ayaz, Lea Fricke, Clemens Fuest and Dominik Sachs

Publication Date: November 2021

Keyword(s): Fiscal Pressure and optimal taxation

Programme Area(s): Macroeconomics and Growth and Public Economics

Abstract: The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase ?scal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is a?ected by this increase. We calibrate the workhorse optimal income tax model to ?ve European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the di?erent countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in ?scal pressure. For all countries, we ?nd that the increase in ?scal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

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Bibliographic Reference

Ayaz, M, Fricke, L, Fuest, C and Sachs, D. 2021. 'Who should bear the burden of COVID-19 related ?scal pressure? An optimal income taxation perspective'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16713