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On the Optimal Timing of Taxes

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Author Info
Hassler, John
Krusell, Per
Storesletten, Kjetil
Zilibotti, Fabrizio

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

Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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This page was last updated on 2009-10-29.

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