IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1992.html
   My bibliography  Save this paper

Measuring the Efficiency Cost of Taxing Risky Capital Income

Author

Listed:
  • Roger H. Gordon
  • John D. Wilson

Abstract

In this paper, we derive a measure of the efficiency cost of taxing risky capital income in an infinite horizon stochastic model. The resulting measure differs from all those that have been proposed in the existing literature. It can be represented by the expression -sigma(s) T(s)c(deltaX(s)), where T(s) measures the present value of the taxes that would be paid on a unit of investment in a riskless project with the same expected depreciation rate and tax treatment as capital invested in period s, X(s), while c(X(s)) represents the certainty equivalent to the representative individual of the lottery where measures the ex post change in investment in period s due to the tax change. The paper then compares this measure with others that have appeared in the literature. We were unable to find support for the argument in Bulow-Suinmers(1984) that the efficiency cost of taxing risky capital income is much larger than that implied by the measure -sigma(s)T(s)E(deltaX(s)). In fact, we show in special cases that our measure implies a smaller efficiency cost than does the measure -sigma(s)T(s)E(deltaX(s)).

Suggested Citation

  • Roger H. Gordon & John D. Wilson, 1986. "Measuring the Efficiency Cost of Taxing Risky Capital Income," NBER Working Papers 1992, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1992
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1992.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24, National Bureau of Economic Research, Inc.
    2. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426, National Bureau of Economic Research, Inc.
    3. Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458, National Bureau of Economic Research, Inc.
    4. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51, National Bureau of Economic Research, Inc.
    5. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(2), pages 263-283.
    6. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    7. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 1-27.
    8. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    9. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
    10. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    11. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    12. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kwang Soo Cheong, 1998. "Corporate Income Taxation and Signaling," Public Finance Review, , vol. 26(5), pages 480-502, September.
    2. Duanjie Chen & Guillermo Perry, 2010. "Mining Taxation in Colombia," Documentos CEDE 12562, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Randall Morck & Masao Nakamura & Murray Frank, 2001. "Japanese Corporate Governance and Macroeconomic Problems," Palgrave Macmillan Books, in: Masao Nakamura (ed.), The Japanese Business and Economic System, chapter 12, pages 325-363, Palgrave Macmillan.
    4. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2020. "Capital income taxation under full loss offset provisions of a prospect theory investor," IHS Working Paper Series 11, Institute for Advanced Studies.
    5. Lans Bovenberg & Krister Anderson & Kenji Aramaki & Sheetal K. Chand, 1990. "Tax Incentives and International Capital Flows: The Case of the United States and Japan," NBER Chapters, in: Taxation in the Global Economy, pages 283-328, National Bureau of Economic Research, Inc.
    6. Bob Hamilton & Jack Mintz & John Whalley, 1991. "Decomposing the Welfare Costs of Capital Tax Distortions: The Importance of Risk Assumptions," NBER Working Papers 3628, National Bureau of Economic Research, Inc.
    7. Devereux, Michael, 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.
    8. Syed M. Ahsan & Panagiotis Tsigaris, 2009. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," Public Finance Review, , vol. 37(6), pages 710-731, November.
    9. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
    10. Patric H. Hendershott, 1987. "Tax Reform and the Slope of the Playing Field," NBER Chapters, in: Taxes and Capital Formation, pages 51-62, National Bureau of Economic Research, Inc.
    11. Kalina Koleva, 2005. "Seeking for an optimal tax administration: the efficiency costs’ approach [A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience]," Post-Print halshs-00195354, HAL.
    12. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
    13. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
    14. Kenneth McKenzie & Jack Mintz, 1992. "Tax Effects on the Cost of Capital," NBER Chapters, in: Canada-U.S. Tax Comparisons, pages 189-216, National Bureau of Economic Research, Inc.
    15. Katharina Finke & Jost H. Heckemeyer & Timo Reister & Christoph Spengel, 2013. "Impact of Tax-Rate Cut cum Base-Broadening Reforms on Heterogeneous Firms: Learning from the German Tax Reform of 2008," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 72-114, March.
    16. Lund, Diderik, 2009. "Marginal versus Average Beta of Equity under Corporate Taxation," Memorandum 12/2009, Oslo University, Department of Economics.
    17. Syed M. Ahsan & Panagiotis Tsigaris, 2011. "The Utility Compensated Effects of a Wage Tax on Human Capital and Consumption Decisions," Public Finance Review, , vol. 39(4), pages 571-593, July.
    18. Kalina Koleva, 2005. "A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience," Cahiers de la Maison des Sciences Economiques r05050, Université Panthéon-Sorbonne (Paris 1).
    19. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
    20. Lund, Diderik, 2005. "An analytical model of required returns to equity under taxation with imperfect loss offset," Memorandum 13/2005, Oslo University, Department of Economics.
    21. Santoro, Marika & Wei, Chao, 2013. "The marginal welfare cost of capital taxation: Discounting matters," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 897-909.
    22. Sara L. McGaughey & Pascalis Raimondos, 2019. "Shifting MNE taxation from national to global profits: A radical reform long overdue," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(9), pages 1668-1683, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Syed M. Ahsan & Panagiotis Tsigaris, 2009. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," Public Finance Review, , vol. 37(6), pages 710-731, November.
    2. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 1-40, National Bureau of Economic Research, Inc.
    3. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
    4. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
    5. Goulder, Lawrence H. & Thalmann, Philippe, 1993. "Approaches to efficient capital taxation : Leveling the playing field vs. living by the golden rule," Journal of Public Economics, Elsevier, vol. 50(2), pages 169-196, February.
    6. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171, Elsevier.
    7. Roger H. Gordon, 1981. "Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions," NBER Working Papers 0687, National Bureau of Economic Research, Inc.
    8. Bob Hamilton & Jack Mintz & John Whalley, 1991. "Decomposing the Welfare Costs of Capital Tax Distortions: The Importance of Risk Assumptions," NBER Working Papers 3628, National Bureau of Economic Research, Inc.
    9. Tryphon Kollintzas, 1986. "Tax Policy under Nongeometric Physical Depreciation," Public Finance Review, , vol. 14(3), pages 263-288, July.
    10. Lizal, L., 1999. "Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises," CERGE-EI Working Papers wp147, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    11. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 767-796.
    12. Konrad, Kai A., 1989. "Kapitaleinkommensteuern und beschleunigte Abschreibungen bei Unsicherheit," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 47(3), pages 404-427.
    13. Marc Rapp & Bernhard Schwetzler, "undated". "Asset Prices in the Presence of a Tax Authority," German Working Papers in Law and Economics 2006-1-1167, Berkeley Electronic Press.
    14. Alan J. Auerbach, 2006. "The Choice Between Income and Consumption Taxes: A Primer," NBER Working Papers 12307, National Bureau of Economic Research, Inc.
    15. George R. Zodrow, 2019. "Taxation, Uncertainty and the Choice of a Consumption Tax Base," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 8, pages 227-237, World Scientific Publishing Co. Pte. Ltd..
    16. Kai A. Konrad, 1991. "Risk Taking and Taxation in Complete Capital Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 16(2), pages 167-177, December.
    17. Lisa Chauvet & Marin Ferry, 2021. "Taxation, infrastructure, and firm performance in developing countries," Public Choice, Springer, vol. 187(3), pages 455-480, June.
    18. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    19. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
    20. Devereux, Michael, 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1992. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.