Researchers around Nobel laureate Joseph Stiglitz have proven in a study that taxing capital to fund public investment reduces wealth inequality without compromising growth.

In the past, mainstream economists have often warned against taxing capital to reduce inequality. The argument: higher taxes hinder economic growth - and lower investment rates reduce prosperity.

In a long-term research project, economists Linus Mattauch, David Klenert, Joseph E. Stiglitz and Ottmar Edenhofer have now shown that taxing capital to finance public investment can reduce wealth inequality without harming economic growth. This finding has enormous potential for science-based economic policy at a time when awareness of the problem of inequality has grown, not least because of the devastating impact of the Covid-19 pandemic in the world's major economies (Chancel et al., 2021).

In their study, the group led by Nobel laureate Joseph Stiglitz shows that wealth taxes can be designed to reduce wealth inequality while increasing efficiency and welfare - especially if they are used to finance public investment, which tends to be severely underfunded in many countries.

The authors consider disparities in saving behavior in a novel way by introducing different wealth groups: dynastic savers and life-cycle savers. They manage to show that, in a scenario where public capital is underfunded, and the elasticity of substitution between labor and capital is moderately high, capital taxes always decrease wealth inequality. The findings are robust for various spending channels, from education to infrastructure. Even for lower elasticities, wealth inequality decreases and the middle class is better off in absolute terms, if capital taxes are designed to be moderately high.

Counteracting hegemonic discourses around wealth inequality, the study shows that there is in fact room for manoeuver to design policies that both respond to inequality and help enable crucial public investments needed to manage the transformation to a climate-neutral economy.

The whole study can be accessed here.

References

Chancel, L., Piketty, T., Saez, E., & Zucman, G. (2021). World inequality report 2022.

Mattauch, L., Klenert, D., Stiglitz, J. E., & Edenhofer, O. (2022). Overcoming wealth inequality by capital taxes that finance public investment. Structural Change and Economic Dynamics.