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What Do Aggregate Consumption Euler Equations Say About the Capital-Income Tax Burden?

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  • Casey Mulligan

Abstract

Aggregate consumption Euler equations fit financial asset return data poorly. But they fit the return on the capital stock well, which leads us to three empirical findings relating to the capital income tax burden. First, capital taxation drives a wedge between consumption growth and the expected pre-tax capital return. Second, capital taxation is the major distortion in the capital market, in the sense that most of the medium and long run deviations between expected consumption growth and the expected pre-tax capital return are associated with capital taxation. Third, consumption growth appears to be pretty elastic to the after-tax capital return (i.e., capital is elastically supplied), even while it appears inelastic to returns on various financial assets. Capital income taxes are passed on through reduced capital accumulation, or higher markups, or some combination.

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Bibliographic Info

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

Volume (Year): 94 (2004)
Issue (Month): 2 (May)
Pages: 166-170

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:166-170

Note: DOI: 10.1257/0002828041302163
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  1. Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  4. Fernando Alvarez & Urban J. Jermann, 1999. "Quantitative asset pricing implications of endogenous solvency constraints," Working Papers 99-5, Federal Reserve Bank of Philadelphia.
  5. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  6. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  7. Casey B. Mulligan, 2004. "Robust Aggregate Implications of Stochastic Discount Factor Volatility," NBER Working Papers 10210, National Bureau of Economic Research, Inc.
  8. Marco Cagetti & Lars Peter Hansen & Thomas Sargent & Noah Williams, 2002. "Robustness and Pricing with Uncertain Growth," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 363-404, March.
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  10. Casey B. Mulligan, 2003. "Capital Tax Incidence: Fisherian Impressions from the Time Series," NBER Working Papers 9916, National Bureau of Economic Research, Inc.
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Cited by:
  1. Alejandro Cunat & Marco Maffezzoli, 2005. "Can comparative advantage explain the growth of US trade?," LSE Research Online Documents on Economics 19919, London School of Economics and Political Science, LSE Library.
  2. Lu, Shu-Shiuan, 2013. "The role of capital market efficiency in long-term growth: A quantitative exploration," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 161-174.
  3. Barbara Annicchiarico & Luisa Corrado & Alessandra Pelloni, 2008. "Long-Term Growth and Short-Term Volatility: The Labour Market Nexus," CDMA Working Paper Series 200806, Centre for Dynamic Macroeconomic Analysis.
  4. Ravi Bansal & Dana Kiku & Amir Yaron, 2009. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," NBER Working Papers 15504, National Bureau of Economic Research, Inc.
  5. François Gourio & Michael Siemer & Adrien Verdelhan, 2011. "International Risk Cycles," NBER Working Papers 17277, National Bureau of Economic Research, Inc.
  6. Casey B. Mulligan, 2011. "Means-Tested Subsidies and Economic Performance Since 2007," NBER Working Papers 17445, National Bureau of Economic Research, Inc.
  7. François Gourio, 2008. "Is there a majority to support a capital tax cut?," Boston University - Department of Economics - Working Papers Series wp2008-001, Boston University - Department of Economics.
  8. Taiji Harashima, 2005. "An Estimate of the Elasticity of Intertemporal Substitution in a Production Economy," Macroeconomics 0508030, EconWPA.

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