Is capital back? The role of land ownership and savings behavior

Abstract

Wealth inequality is a major political concern in most OECD countries. Under this premise, we analyze different policy instruments in terms of their impact on wealth inequality and output. In a general equilibrium model, we disaggregate wealth in its capital and land components, and savings in their life-cycle and bequest components. Households are heterogeneous in their taste for leaving bequests. We show that governments have considerable freedom in reducing wealth inequality without sacrificing output: Land rent taxes enhance output due to a portfolio effect and reduce wealth inequality slightly. Bequest taxes have the highest potential to reduce inequality, and their effect on output is moderate. By contrast, we confirm the standard result that capital taxes reduce output strongly and show that they only have moderate redistributive effects. Furthermore, we find that using the tax proceeds for transfers to the young generations enhances output the most and further reduces wealth inequality.