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Machines, Buildings, and Optimal Dynamic Taxes

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  • Hakki Yazici

    (Sabanci University)

  • Ctirad Slavik

    (Goethe University in Frankfurt)

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    Abstract

    The effective marginal tax rates on returns to capital assets show considerable amount of variation depending on the asset type in the U.S. corporate tax code. For instance, the effective marginal tax rate on the return to communications equipment is 19% whereas it is above 35% for non-residential buildings. This feature of the tax code has been the subject of a growing debate among policymakers, because it contributes to the existence of signicant gaps between the effective tax rates faced by companies in different industries. President Obama recently called for a reform to abolish the tax rules that create differential axation of capital assets in order to "level the playing field" across companies. In contrast to the extent of these policy debates, there has been little research on whether differential taxation of capital income based on capital type is a desirable feature of the tax code. In this paper, we take a step in this direction. Our theory confirms the optimality of differential capital asset taxation, but with an important caveat. Capital assets can be divided into two groups based on the tax treatment they receive in the U.S. tax code: structures and equipment. As documented by Gravelle (2011), in the current U.S. tax code the effective tax rate on equipment capital is on average 6% below the effective tax rate on structure capital. In contrast, our theory suggests that capital equipment should be taxed at a higher rate than capital structures. We conduct a quantitative exercise to assess the quantitative importance of optimal differential capital taxation. In our baseline calibration we find that the tax rate on capital equipments should be at least 19% higher than the tax rate on structure capital.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 766.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:766

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    1. Mikhail Golosov & Aleh Tayvinski & Matthew Weinzierl, 2010. "Preference Heterogeneity and Optimal Capital Income Taxation," STICERD - Public Economics Programme Discussion Papers 04, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    11. John Duffy & Chris Papageorgiou & Fidel Perez-Sebastian, 2004. "Capital-Skill Complementarity? Evidence from a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 327-344, February.
    12. Grochulski, Borys & Piskorski, Tomasz, 2010. "Risky human capital and deferred capital income taxation," Journal of Economic Theory, Elsevier, vol. 145(3), pages 908-943, May.
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