The optimal distribution of the tax burden over the business cycle

This paper analyses optimal income taxation over the business cycle for households di¤erentiated by labour skill, income and wealth. A model incorporating capital-skill complementarity in production and di¤erential access to labour and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We …rst …nd that, under a fully ‡exible budget, the income taxation burden over the business cycle is spread roughly equally across the high-, middle- and low-income households. However, under a balanced budget restriction, the burden is distributed least favourably to the middle-income and most favourably to the high income households.