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  • Konstantinos Angelopoulos (a1), Stylianos Asimakopoulos (a2) and James Malley (a1)


This paper analyzes optimal capital and labor income taxation for households differentiated by labor skill, income, and wealth, under a balanced government budget, over the business cycle. A model incorporating capital–skill complementarity in production and differential access to labor and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that optimal taxes for middle-income households are more volatile than the remaining taxes. Moreover, the government re-allocates the total tax burden in bad times so that the share of total tax revenue paid by middle-income households rises. This share also rises for low-income households but by significantly less, whereas the tax share for skilled households falls.


Corresponding author

Address correspondence to: Stylianos Asimakopoulos, Department of Economics, University of Bath, Claverton Down, 3 East 4.24, Bath BA2 7AY, UK; e-mail:


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We would like to thank the editor, William Barnett, two anonymous referees, an associate editor, Marco Bassetto, Andrew Clausen, Fabrice Collard, Richard Dennis, Michael Hatcher, Wei Jiang, Matthew Lindquist, Ioana Moldovan, Charles Nolan, Apostolis Philippopoulos, and Fabien Postel-Vinay, participants at the CESifo Macro Area Conference 2015, Royal Economic Society 2014 Annual Conference, the Universities of Kent, Aberdeen and Nottingham for helpful comments and suggestions. We are also grateful for financial support from the ESRC, Grant Nos. RES-062-23-2292 and ES/I902414/1.



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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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