On growth-optimal tax rates and the issue of wealth inequalities

TL;DR

This paper presents an analytical model to determine optimal wealth tax rates considering public-private sector performance, revealing conditions for zero, partial, or full taxation and their impact on growth and inequalities.

Contribution

It introduces a stylized, fully solvable model linking wealth tax policies to economic growth and inequality, highlighting the trade-offs involved.

Findings

Optimal wealth tax is 0% with dysfunctional government or productive private sector.

Optimal wealth tax is 100% with efficient public sector or risk-averse investors.

Moderate performance gaps lead to a positive optimal wealth tax rate.

Abstract

We introduce a highly stylized, yet non trivial model of the economy, with a public and private sector coupled through a wealth tax and a redistribution policy. The model can be fully solved analytically, and allows one to address the question of optimal taxation and of wealth inequalities. We find that according to the assumption made on the relative performance of public and private sectors, three situations are possible. Not surprisingly, the optimal wealth tax rate is either 0% for a deeply dysfunctional government and/or highly productive private sector, or 100 % for a highly efficient public sector and/or debilitated/risk averse private investors. If the gap between the public/private performance is moderate, there is an optimal positive wealth tax rate maximizing economic growth, even -- counter-intuitively -- when the private sector generates more growth. The compromise between profitable private investments and taxation however leads to a residual level of inequalities. The mechanism leading to an optimal growth rate is related the well-known explore/exploit trade-off.