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What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?

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  • Casey B. Mulligan

Abstract

Aggregate consumption Euler equations fit financial asset return data poorly. But they fit the return on the capital stock well, which leads us to three empirical findings relating to the capital income tax burden. First, capital taxation drives a wedge between consumption growth and the expected pre-tax capital return. Second, capital taxation is the major distortion in the capital market, in the sense that most of the medium and long run deviations between expected consumption growth and the expected pre-tax capital return are associated with capital taxation. Third, consumption growth appears to be pretty elastic to the after-tax capital return (i.e., capital is elastically supplied), even while it appears inelastic to returns on various financial assets. Capital income taxes are passed on through reduced capital accumulation, or higher markups, or some combination.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10262.

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Date of creation: Feb 2004
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Publication status: published as Mulligan, Casey B. "What Do Aggregate Consumption Euler Equations Say About The Capital-Income Tax Burden?," American Economic Review, 2004, v94(2,May), 166-170.
Handle: RePEc:nbr:nberwo:10262

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  1. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. Fernando Alvarez & Urban J. Jermann, . "Quantitative Asset Pricing Implications of Endogenous Solvency Constraints," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 10-99, Wharton School Rodney L. White Center for Financial Research.
  5. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 381-408, June.
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  7. Casey B. Mulligan, 2004. "Robust Aggregate Implications of Stochastic Discount Factor Volatility," NBER Working Papers 10210, National Bureau of Economic Research, Inc.
  8. Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
  9. Marco Cagetti & Lars Peter Hansen & Thomas Sargent & Noah Williams, 2002. "Robustness and Pricing with Uncertain Growth," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(2), pages 363-404, March.
  10. Casey B. Mulligan, 2003. "Capital Tax Incidence: Fisherian Impressions from the Time Series," NBER Working Papers 9916, National Bureau of Economic Research, Inc.
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Cited by:
  1. Alejandro Cunat & Marco Maffezzoli, 2003. "Can Comparative Advantage Explain the Growth of US Trade?," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 241, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Ravi Bansal & Dana Kiku & Amir Yaron, 2009. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," NBER Working Papers 15504, National Bureau of Economic Research, Inc.
  3. François Gourio & Michael Siemer & Adrien Verdelhan, 2011. "International Risk Cycles," NBER Working Papers 17277, National Bureau of Economic Research, Inc.
  4. Taiji Harashima, 2005. "An Estimate of the Elasticity of Intertemporal Substitution in a Production Economy," Macroeconomics, EconWPA 0508030, EconWPA.
  5. Casey B. Mulligan, 2011. "Means-Tested Subsidies and Economic Performance Since 2007," NBER Working Papers 17445, National Bureau of Economic Research, Inc.
  6. Barbara Annicchiarico & Luisa Corrado & Alessandra Pelloni, 2008. "Long-Term Growth and Short-Term Volatility: The Labour Market Nexus," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200806, Centre for Dynamic Macroeconomic Analysis.
  7. Gourio, François, 2009. "Is there a majority to support a capital tax cut?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(6), pages 1278-1295, June.
  8. Lu, Shu-Shiuan, 2013. "The role of capital market efficiency in long-term growth: A quantitative exploration," Journal of Macroeconomics, Elsevier, Elsevier, vol. 36(C), pages 161-174.

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