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Measuring the Efficiency Cost of Taxing Risky Capital Income

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  • 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)).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1992.

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Date of creation: Aug 1986
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Publication status: published as The American Economic Review, Vol. 79, No. 3, pp. 429-439, (June 1989).
Handle: RePEc:nbr:nberwo:1992

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  1. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters, National Bureau of Economic Research, Inc, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426 National Bureau of Economic Research, Inc.
  2. 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.
  3. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(1), pages 1-27, February.
  4. Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters, National Bureau of Economic Research, Inc, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458 National Bureau of Economic Research, Inc.
  5. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 12(1), pages 39-91, January.
  6. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 9(3), pages 785-97, September.
  7. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  8. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24 National Bureau of Economic Research, Inc.
  9. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, National Bureau of Economic Research, Inc, in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
  10. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 213-24, January.
  11. 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.
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Cited by:
  1. Patric H. Hendershott, 1986. "Tax Reform and the Slope of the Playing Field," NBER Working Papers 1909, National Bureau of Economic Research, Inc.
  2. Pierre-Pascal Gendron & Gordon Anderson & Jack M. Mintz, 2003. "Corporation Tax Asymmetries and Firm-Level Investment in Canada," International Tax Program Papers, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto 0303, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  3. 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.
  4. 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.
  5. 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.
  6. Kwang Soo Cheong, 1997. "Corporate Income Taxation and Signaling," Working Papers, University of Hawaii at Manoa, Department of Economics 199713, University of Hawaii at Manoa, Department of Economics.
  7. Santoro, Marika & Wei, Chao, 2013. "The marginal welfare cost of capital taxation: Discounting matters," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(4), pages 897-909.
  8. Michael P. Devereux, 2009. "Taxing Risky Investment," Working Papers, Oxford University Centre for Business Taxation 0919, Oxford University Centre for Business Taxation.
  9. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  10. Randall Morck & Masao Nakamura, 2000. "Japanese Corporate Governance and Macroeconomic Problems," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1893, Harvard - Institute of Economic Research.
  11. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers, Copenhagen Business School, Department of Economics 02-2003, Copenhagen Business School, Department of Economics.
  12. 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, Université Panthéon-Sorbonne (Paris 1) r05050, Université Panthéon-Sorbonne (Paris 1).
  13. 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, National Bureau of Economic Research, Inc, in: Taxation in the Global Economy, pages 283-328 National Bureau of Economic Research, Inc.
  14. repec:hal:journl:halshs-00195354 is not listed on IDEAS

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