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Altruism, incomplete markets, and tax reform

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  • Fuster, Luisa
  • Imrohoroglu, Ayse
  • Imrohoroglu, Selahattin

Abstract

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.

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Bibliographic Info

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

Volume (Year): 55 (2008)
Issue (Month): 1 (January)
Pages: 65-90

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Handle: RePEc:eee:moneco:v:55:y:2008:i:1:p:65-90

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

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References

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Citations

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Cited by:
  1. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Working Papers 685, Federal Reserve Bank of Minneapolis.
  2. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
  3. Cagri Seda Kumru & John Piggott, 2012. "Optimal Capital Income Taxation with Means-tested Benefits," Working Papers 201215, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  4. Kartik B. Athreya & Devin Reilly, 2009. "Consumption smoothing and the measured regressivity of consumption taxes," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 75-100.
  5. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2008. "Intermediated quantities and returns," Staff Report 405, Federal Reserve Bank of Minneapolis.
  6. Peterman, William B., 2013. "Determining the motives for a positive optimal tax on capital," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 265-295.
  7. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.

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