The Role of Capital Taxation in Sweden: Inheritance and Wealth Accumulation over the Lifecycle

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: Against the backdrop of increasing levels of wealth inequality in the Swedish economy, this thesis will deploy a large scale overlapping generations model with heterogeneous ability groups to evaluate the behavioral responses of individuals across the lifecycle as well as distributional and efficiency impacts of tax policy. Specifically, the paper will examine effects resulting from a reintroduction of inheritance taxation and varying rates of increase in the capital income tax rate. The model is closely calibrated to the Swedish economy and provides a confirmation of the equity - efficiency trade-off involved in redistributional tax policies. The findings suggest a varying rate of this trade-off, however, and indicate that certain levels of increased capital gains taxation can generate substantial increases in equality while maintaining limited distortionary effects. Additionally, the introduction of an inheritance taxation suggests non-negligible positive impacts on inequality with minimal distortionary impacts on aggregate economic outcomes.

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