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.