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Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution

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  • Santanu Chatterjee
  • Paola Giuliano
  • Stephen J. Turnovsky

Abstract

This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, ϵ, and the coefficient of risk aversion, R, can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both ϵ and R. Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition (R= 1/ϵ) can be significant, suggesting that this functional form should be employed with caution. Copyright 2004 Blackwell Publishing Inc..

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 6 (2004)
Issue (Month): 2 (05)
Pages: 277-310

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Handle: RePEc:bla:jpbect:v:6:y:2004:i:2:p:277-310

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Cited by:
  1. Pommeret, Aude & Smith, William T., 2005. "Fertility, volatility, and growth," Economics Letters, Elsevier, vol. 87(3), pages 347-353, June.
  2. Palivos, Theodore & Varvarigos, Dimitrios, 2011. "Intergenerational complementarities in education, endogenous public policy, and the relation between growth and volatility," MPRA Paper 31343, University Library of Munich, Germany.
  3. Klaus Wälde, 2009. "Production Technologies in Stochastic Continuous Time Models," CESifo Working Paper Series 2831, CESifo Group Munich.

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