Demographics and the politics of capital taxation in a life-cycle economy

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Description/Abstract

This article studies the effects of demographics on the mix of tax rates on labour and capital. It uses a quantitative general-equilibrium overlapping-generations model where tax rates are voted without past commitments in every period and characterized as a Markov equilibrium. In the U.S., the younger voting-age population in 1990 compared to 1965 accounts for the observed decline in the relative capital tax rate between those two years. A younger population rises the net return to capital, leads voters to increase their savings, and results in a preference for lower taxes on capital
Conversely, ageing might increase capital taxation.