Measuring the Efficiency Cost of Taxing Risky Capital Income
AbstractThis 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 InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 79 (1989)
Issue (Month): 3 (June)
Other versions of this item:
- Roger H. Gordon & John D. Wilson, 1990. "Measuring the Efficiency Cost of Taxing Risky Capital Income," NBER Working Papers 1992, National Bureau of Economic Research, Inc.
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