DP16713 Who should bear the burden of COVID-19 related ?scal pressure? An optimal income taxation perspective

Author(s): Mehmet Ayaz, Lea Fricke, Clemens Fuest, Dominik Sachs
Publication Date: November 2021
Keyword(s): Fiscal Pressure, optimal taxation
JEL(s): H21, H23
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16713

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.