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The Deadweight Loss from `Non-Neutral' Capital Income Taxation

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Alan J. Auerbach

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Abstract

This paper develops an overlapping generations general equilibrium growth model with an explicit characterization of the role of capital goods in the production process. The model is rich enough in structure to evaluate and measure simultaneously the different distortions associated with capital income taxation (across sectors, across assets and across time) yet simple enough to yield intuitive analytical results as well. The main result is that uniform capital income taxation is almost certainly suboptimal, theoretically, but that empirically, optimal deviations from uniform taxation are inconsequential. We also find that though the gains from a move to uniform taxation are not large in absolute magnitude these gains would be offset only by an overall rise in capital income tax rates of several percentage points. A separate contribution of the paper is the development of a technique for distinguishing intergenerational transfers from efficiency gains in analyzing the effects of policy changes on long-run welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2510.

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Date of creation: Apr 1990
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Handle: RePEc:nbr:nberwo:2510

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  1. Brita Bye and Turid Åvitsland, 2001. "The welfare effects of housing taxation in a distorted economy: A general equilibrium analysis," Discussion Papers 306, Research Department of Statistics Norway. [Downloadable!]
  2. Sijbren Cnossen & Lans Bovenberg, 2001. "Fundamental Tax Reform in The Netherlands," International Tax and Public Finance, Springer, vol. 8(4), pages 471-484, August. [Downloadable!] (restricted)
    Other versions:
  3. Blackorby, Charles & Brett, Craig, 2004. "Capital Taxation In A Simple Finite-Horizon Olg Model," The Warwick Economics Research Paper Series (TWERPS) 709, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  4. Peter Birch Sørensen, 2006. "The Theory of Optimal Taxation: What is the Policy Relevance?," EPRU Working Paper Series 06-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  5. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Jinyong Cai & Jagadeesh Gokhale, 1990. "What does the capital income tax distort?," Working Paper 9013, Federal Reserve Bank of Cleveland. [Downloadable!]
  7. Jinyong Cai & Jagadeesh Gokhale, 1997. "The welfare loss from a capital income tax," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-10. [Downloadable!]
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