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

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  • Alan J. Auerbach

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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Bibliographic Info

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: Feb 1988
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Publication status: published as Journal of Public Economics, Vol. 40, pp. 1-36, (1989).
Handle: RePEc:nbr:nberwo:2510

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Cited by:
  1. Jinyong Cai & Jagadeesh Gokhale, 1990. "What does the capital income tax distort?," Working Paper 9013, Federal Reserve Bank of Cleveland.
  2. Hagen, Kare P. & Kanniainen, Vesa, 1995. "Optimal taxation of intangible capital," European Journal of Political Economy, Elsevier, vol. 11(2), pages 361-378, June.
  3. Cnossen,Sijbren & Bovenberg,Lans, 2000. "Fundamental Tax Reform In The Netherlands," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Brita Bye & Turid Ã…vitsland, 2001. "The welfare effects of housing taxation in a distorted economy: A general equilibrium analysis," Discussion Papers, Research Department of Statistics Norway 306, Research Department of Statistics Norway.
  5. James R. Hines Jr., 1998. "Investment Ramifications of Distortionary Tax Subsidies," NBER Working Papers 6615, National Bureau of Economic Research, Inc.
  6. Holmoy, Erling & Vennemo, Haakon, 1995. "A general equilibrium assessment of a suggested reform in capital income taxation," Journal of Policy Modeling, Elsevier, Elsevier, vol. 17(6), pages 531-556, December.
  7. Sijbren Cnossen & Lans Bovenberg, 2000. "Fundamental Tax Reform in The Netherlands," CESifo Working Paper Series 342, CESifo Group Munich.
  8. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1997. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc.
  9. 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.
  10. Jinyong Cai & Jagadeesh Gokhale, 1997. "The welfare loss from a capital income tax," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q I, pages 2-10.

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