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Altruism, Incomplete Markets, and Tax Reform

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  • Selo Imrohoroglu

    (USC)

  • Ayse Imrohoroglu

    (USC)

  • Luisa Fuster

    (University of Toronto)

Abstract

We calibrate the model to the U.S. data and numerically characterize transition paths from the current tax system to a reformed system. All our experiments are revenue-neutral. Starting from the current tax code, we allow for transitions to reformed steady-states in which the capital income taxation or labor income taxation is eliminated, with the lost revenues replaced by a higher labor income or consumption tax. In all cases, the reformed steady-state yields significantly higher capital and consumption. When the capital income tax is replaced by a higher labor income tax, only 38.4% are in favor. Using a consumption tax instead of the labor income tax raises support for reform to 45.7%. Eliminating the capital income tax in a phased-out fashion and using the more efficient consumption tax to replace the lost revenues brings support to 71.4%.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 491.

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Date of creation: 2007
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Handle: RePEc:red:sed007:491

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References

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Cited by:
  1. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  2. Peterman, William B., 2013. "Determining the motives for a positive optimal tax on capital," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 265-295.
  3. Kartik B. Athreya & Devin Reilly, 2009. "Consumption smoothing and the measured regressivity of consumption taxes," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 75-100.
  4. Rajnish Mehra & Edwarad C Prescott & Facundo Piguillem, 2007. "Intermediated Quantities and Returns," Levine's Bibliography 122247000000001580, UCLA Department of Economics.
  5. Cagri Seda Kumru & John Piggott, 2012. "Optimal Capital Income Taxation with Means-tested Benefits," Working Papers 201215, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  6. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1), pages 1-36, 03.
  7. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.

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