The Welfare Effects of a Capital Income Tax Reform in Sweden
Abstract: The aim of the thesis is to assess if an elimination of the capital income tax in Sweden results in welfare gains on the aggregated level and for a majority of the population. Studies of the effects of capital income tax reforms in dynamic equilibrium models find that, while there are aggregated gains from such reforms, the distribution of capital and labor income has a large impact on the welfare gains on the individual level. We take this distributional aspect into consideration and assume that households are heterogeneous in their capital and labor income. The distributions of capital and labor income are set to correspond to Swedish data. This thesis argues that there are substantial welfare losses from an elimination of the capital income tax in Sweden, both on the aggregated level and across the majority of the households. However, a smaller reduction of the capital income tax does result in welfare gains both on the aggregated level and across the majority of the households. The conclusion is reached through simulations of changes in the capital income tax in a dynamic equilibrium model of the Swedish economy.
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