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Optimal Capital Taxation Under Limited Commitment

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  • Junsang Lee

    ()

  • Yili Chien

    ()

Abstract

We study optimal capital taxation under limited commitment. We prove that the optimal tax rate on capital income should be positive in steady state provided that full risk-sharing is not feasible. In a limited commitment environment, a one unit increase of capital investment by an agent increases all individuals' autarky values in the economy and generates externality costs in the economy. This externality cost provides a rationale for positive capital taxation even in the absence of government expenditure. Moreover, we show that both this externality cost of capital investment and the optimal tax rate are potentially much bigger than one might expect.

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2008-498.

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Length: 31 Pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:acb:cbeeco:2008-498

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Cited by:
  1. Junsang Lee & Yili Chien, 2008. "Why Tax Capital?," ANU Working Papers in Economics and Econometrics 2008-497, Australian National University, College of Business and Economics, School of Economics.
  2. Eva Carceles-Poveda & Arpad Abraham, 2005. "Complete Markets, Enforcement Constraints and Intermediation," 2005 Meeting Papers 661, Society for Economic Dynamics.
  3. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.

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