Working Paper
Who Should Bear the Burden of Covid-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective
Mehmet Ayaz, Lea Fricke, Clemens Fuest, Dominik Sachs
ifo Institute, Munich, 2021
ifo Working Paper No. 358
ifo Institute, Munich, 2021
ifo Working Paper No. 358
The Covid-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase in fiscal pressure. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. We apply the inverse-optimum approach to the pre-Covid-19 economies. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.
Keywords: Fiscal pressure, optimal taxation
JEL Classification: H210, H230