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Optimal state-contingent capital taxation: when is there an indeterminacy?

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  • Bohn, Henning

Abstract

Several recent papers on dynamically optimal taxation have derived an indeterminacy result regarding state-contingent capital taxation in stochastic models with state-contingent government liabilities. The indeterminacy arises because the government has N degrees of freedom to set tax rates on capital income in N states of nature, only subject to a single constraint that assures an optimal level of capital investment. The paper shows that this indeterminacy result is a consequence of the assumption that the economy has only a single production technology. If there are many technologies, there will be additional constraints, because differences in capital income tax rates in different states of nature will create incentives to invest in those technologies that have high payoffs in states with relatively low tax rates. If there are a large number of technologies, both the structure of capital tax rates and the structure of government debt are tied down in many dimensions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 34 (1994)
Issue (Month): 1 (August)
Pages: 125-137

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Handle: RePEc:eee:moneco:v:34:y:1994:i:1:p:125-137

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. Baltasar Manzano & Jesús Ruiz, 2002. "Política Fiscal Óptima: el estado de la Cuestión," Documentos del Instituto Complutense de Análisis Económico 0212, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
  3. Baltasar Manzano & Jess Ruz, 2000. "Optimal Fiscal Policy In A Business Cycle Model: Alternative Identifications Of The Optimal Expost Capital Income Tax Rates," Computing in Economics and Finance 2000 351, Society for Computational Economics.
  4. Kevin J. Lansing, 1995. "Optimal fiscal policy when public capital is productive: a business cycle perspective," Working Paper 9507, Federal Reserve Bank of Cleveland.
  5. Henning Bohn, 2001. "Retirement Savings in an Aging Society: A Case for Innovative Government Debt Management," CESifo Working Paper Series 494, CESifo Group Munich.
  6. Ghada Abbas, 2006. "Gestion de la dette publique et lissage des taux d’imposition," CAE Working Papers 46, Aix-Marseille Université, CERGAM.

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