DP16713 Who should bear the burden of COVID-19 related ï¬?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|
|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 Ã¯Â¬?scal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is aÃ¯Â¬?ected by this increase. We calibrate the workhorse optimal income tax model to Ã¯Â¬?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 diÃ¯Â¬?erent countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in Ã¯Â¬?scal pressure. For all countries, we Ã¯Â¬?nd that the increase in Ã¯Â¬?scal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.