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Measuring the Efficiency Cost of Taxing Risky Capital Income

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  • Gordon, Roger H
  • Wilson, John Douglas

Abstract

This paper derives a measure of the efficiency cost of taxing risky capital income in an infinite horizon stochastic model. The resulting expression differs from all those proposed in the existing literature. The correct measure of efficiency cost will normally be smaller than any of those used in policy studies, possibly dramatically so. Uncertainty changes the expression for efficiency cost through effects arising not only from stochastic capital gains on existing capital, but also from stochastic costs of replacing existing capital. The latter effect reduces efficiency costs and normally outweighs the first effect. Copyright 1989 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 3 (June)
Pages: 427-39

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:3:p:427-39

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  1. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  3. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  4. Don Fullerton & Roger H. Gordon, 1981. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Working Papers 0673, National Bureau of Economic Research, Inc.
  5. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24 National Bureau of Economic Research, Inc.
  6. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  7. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-97, September.
  8. Joel Slemrod, 1981. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Working Papers 0799, National Bureau of Economic Research, Inc.
  9. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
  10. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
  11. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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Cited by:
  1. Syed M. Ahsan & Panagiotis Tsigaris, 2008. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," CESifo Working Paper Series 2203, CESifo Group Munich.
  2. Bob Hamilton & Jack Mintz & John Whalley, 1991. "Decomposing the Welfare Costs of Capital Tax Distortions: The Importance of Risk Assumptions," NBER Working Papers 3628, National Bureau of Economic Research, Inc.
  3. Devereux, Michael P, 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.
  4. Kwang Soo Cheong, 1997. "Corporate Income Taxation and Signaling," Working Papers 199713, University of Hawaii at Manoa, Department of Economics.
  5. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  6. Pierre-Pascal Gendron & Gordon Anderson & Jack M. Mintz, 2003. "Corporation Tax Asymmetries and Firm-Level Investment in Canada," International Tax Program Papers 0303, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  7. repec:hal:journl:halshs-00195354 is not listed on IDEAS
  8. Patric H. Hendershott, 1987. "Tax Reform and the Slope of the Playing Field," NBER Chapters, in: Taxes and Capital Formation, pages 51-62 National Bureau of Economic Research, Inc.
  9. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
  10. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
  11. Kalina Koleva, 2005. "A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience," Cahiers de la Maison des Sciences Economiques r05050, Université Panthéon-Sorbonne (Paris 1).
  12. Randall Morck & Masao Nakamura, 2000. "Japanese Corporate Governance and Macroeconomic Problems," Harvard Institute of Economic Research Working Papers 1893, Harvard - Institute of Economic Research.
  13. Lans Bovenberg & Krister Anderson & Kenji Aramaki & Sheetal K. Chand, 1990. "Tax Incentives and International Capital Flows: The Case of the United States and Japan," NBER Chapters, in: Taxation in the Global Economy, pages 283-328 National Bureau of Economic Research, Inc.
  14. Santoro, Marika & Wei, Chao, 2013. "The marginal welfare cost of capital taxation: Discounting matters," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 897-909.

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