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A Note on the Optimality of the Cash Flow Tax

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Author Info
Pablo Serra ()
Daniel Hojman ()

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Abstract

This paper analyzes the optimal tax policy within an endoge-nous growth model with productive government spending. We consider a one-factor (human capital) one-good economy, with the latter serving both as a final and an intermediate good. The government levies taxes in order to finance the provision of the intermediate good. Within this framework we show a highly intuitive result: the optimal tax structure is a 100 percent tax on cash flows and no tax on labor income. As a consequence, the consumption tax causes a deadweight loss, which increases with the intensity of use of the intermediate good.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 83.

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Date of creation: 2000
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Handle: RePEc:edj:ceauch:83

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  1. Auerbach, Alan J, 1997. "The Future of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 143-46, May. [Downloadable!] (restricted)
  2. William M. Gentry & R. Glenn Hubbard, 1997. "Distributional Implications of Introducing a Broad-Based Consumption Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 1-48 National Bureau of Economic Research, Inc. [Downloadable!]
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  3. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  5. Giancarlo Corsetti & Nouriel Roubini, 1996. "Optimal Government Spending and Taxation in Endgenous Growth Models," NBER Working Papers 5851, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Gian Maria Milesi-Ferrett & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," NBER Working Papers 5317, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing?," NBER Working Papers 6199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  9. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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