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On the Optimal Timing of Taxes

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  • Hassler, John
  • Krusell, Per
  • Storesletten, Kjetil
  • Zilibotti, Fabrizio

Abstract

This Paper analyses the optimal timing of taxes on capital income. We show that the celebrated result that taxes should front-loaded with an initially high tax followed by a discrete jump to the steady state is knife-edge, hinging on capital having a constant depreciation rate. An empirically supported deviation from this case, involving depreciation rates that increase over the lifespan of the investment, implies that optimal taxes should oscillate. Furthermore, the optimality of fluctuating tax rates hinges on the government being able to commit to the path of future tax rates. Without commitment, optimal taxes may be smooth also under accelerating depreciation. In a calibrated example, we find that optimal taxes are oscillating under commitment and smooth without commitment.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4731.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4731

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Keywords: capital depreciation; optimal taxation; tax dynamics; time-consistency;

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