The Distributional Consequences of Tax Reforms Under Capital-Skill Complementarity.

This paper analyses wage inequality and the welfare effects of changes in capital and labour income tax rates for different types of agents. To achieve this, we develop a model that allows for capital-skill complementarity given non-uniform distributions of asset holdings and labour skills. We find that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the inequality effects of capital tax reductions are lower over the transition period compared with the long run. [ABSTRACT FROM AUTHOR]