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Center for Public Finance



Nonlinear taxation in an economy with heterogeneous firms and heterogeneous households

Nonlinear taxation in an economy with heterogeneous firms and heterogeneous households.

By Jorge Barro and Efraim Berkovich

In an economy with heterogeneous firms and heterogeneous consumers, the authors describe a general equilibrium where firm equity is priced by a supply and demand process. With a model robust to arbitrary, nonlinear tax functions, they investigate the efficiency of replacing the current U.S. tax regime with a policy of no corporate taxes and taxation of capital distributions to the household at progressive personal income tax rates. They find that this policy reduces wealth inequality and increases total welfare.