Trading with the Unborn: A New Perspective on Capital Income Taxation
AbstractSecurity markets between generations are incomplete in the laissez-faire economy since risk sharing agreements cannot be made with the unborn. But suppose that generations could trade if, for example, a representative of the unborn negotiated on their behalf today. What would the trades look like? Can government fiscal policy by used to replicate these trades? Would completing this missing market be pareto improving when the introduction of the new security changes the prices of existing assets? This paper characterizes analytically the hypothetical trades between generations. It shows how the government can replicate these trades by taxing the realized equity premium on investments by either a positive amount or a negative amount. When technology shocks are mostly driven by changes in depreciation, a positive tax on the equity premium replicates the hypothetical trades; this tax is also driven by changes in productivity, the choice between a positive and negative tax rate is unclear. However, with log utility, Cobb-Douglas production, and a depreciation rate less than 100 percent, the equity premium is to be taxed at a negative rate; this tax is also pareto improving. Finally, simulation analysis is used to consider more complicated cases, including when depreciation and productivity are both uncertain. Under the baseline calibration for the U.S., a positive tax on the equity premium is pareto improving.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp066.
Length: 46 pages
Date of creation: May 2004
Date of revision:
Contact details of provider:
Postal: P.O. Box 1248, Ann Arbor, MI 48104
Phone: (734) 615-0422
Fax: (734) 647-4575
Web page: http://www.mrrc.isr.umich.edu/publications/papers/
More information through EDIRC
Other versions of this item:
- Kent A. Smetters, 2003. "Trading with the Unborn: A New Perspective on Capital Income Taxation," NBER Working Papers 9412, National Bureau of Economic Research, Inc.
- D9 - Microeconomics - - Intertemporal Choice and Growth
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-13 (All new papers)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Gottardi, Piero & Kubler, Felix, 2011.
"Social security and risk sharing,"
Journal of Economic Theory,
Elsevier, vol. 146(3), pages 1078-1106, May.
- Felix Kubler & Department of Economics & Department of Economics & Piero Gottardi, 2007. "Social Security and RIsk Sharing," 2007 Meeting Papers 625, Society for Economic Dynamics.
- Piero Gottardi & Felix Kubler, 2006. "Social Security and Risk Sharing," CESifo Working Paper Series 1705, CESifo Group Munich.
- Piero Gottardi & Felix Kubler, 2009. "Social Security and Risk Sharing," Economics Working Papers ECO2009/12, European University Institute.
- Piero Gottardi & Felix Kubler, 2006. "Social Security and Risk Sharing," Working Papers 2006_38, Department of Economics, University of Venice "Ca' Foscari".
- Olovsson, Conny, 2004.
"The Welfare Gains of Improving Risk Sharing in Social Security,"
728, Stockholm University, Institute for International Economic Studies.
- Conny Olovsson, 2005. "The Welfare Gains of Improving Risk Sharing in Social Security," 2005 Meeting Papers 584, Society for Economic Dynamics.
- Espen Henriksen & Steve Spear, 2006. "Dynamic Suboptimality of Competitive Equilibrium in Multiperiod Overlapping Generations Economies," Computing in Economics and Finance 2006 223, Society for Computational Economics.
- Olovsson, Conny, 2004. "Social Security and the Equity Premium Puzzle," Seminar Papers 729, Stockholm University, Institute for International Economic Studies.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (MRRC Administrator).
If references are entirely missing, you can add them using this form.