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On the Optimal Timing of Capital Taxes

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  • John Hassler
  • Per Krusell
  • Kjetil Storesletten
  • Fabrizio Zilibotti

Abstract

For many kinds of capital, depreciation rates change systematically with the age of the capital. Consider an example that captures essential aspects of human capital, both regarding its accumulation and its depreciation: a worker obtains knowledge in period 0, then uses this knowledge in production in periods 1 and 2, and thereafter retires. Here, depreciation accelerates: it occurs at a 100% rate after period 2, and at a lower (perhaps zero) rate before that. The present paper analyzes the implications of non-constant depreciation rates for the optimal timing of taxes on capital income. The main finding is that under natural assumptions, the path of tax rates over time must be oscillatory. Oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital (as in the above example), and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 343.

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Date of creation: Dec 2007
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Handle: RePEc:zur:iewwpx:343

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Keywords: Asset depreciation; Human capital; Optimal taxation; Oscillations; State-contingent taxes; Tax dynamics.;

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, Elsevier, vol. 28(1), pages 59-83, October.
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  4. Hassler, John & Storesletten, Kjetil & Zilibotti, Fabrizio, 2003. "Democratic Public Good Provision," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4044, C.E.P.R. Discussion Papers.
  5. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9812, University of Western Ontario, Department of Economics.
  6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
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  8. Mark E. Doms & Wendy E. Dunn & Stephen D. Oliner & Daniel E. Sichel, 2003. "How fast do personal computers depreciate? concepts and new estimates," Working Paper Series, Federal Reserve Bank of San Francisco 2003-20, Federal Reserve Bank of San Francisco.
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  12. Stephen D. Oliner, 1993. "New evidence on the retirement and depreciation of machine tools," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 147, Board of Governors of the Federal Reserve System (U.S.).
  13. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(7), pages 1331-1358, October.
  14. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, Elsevier, vol. 15(3), pages 367-396, April.
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  16. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, Elsevier, vol. 60(1), pages 147-151, April.
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Cited by:
  1. Kulp, Alison & Hartman, Joseph C., 2011. "Optimal tax depreciation with loss carry-forward and backward options," European Journal of Operational Research, Elsevier, Elsevier, vol. 208(2), pages 161-169, January.
  2. Klein, Paul & Krusell, Per & Ríos-Rull, José-Víctor, 2004. "Time Consistent Public Expenditures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4582, C.E.P.R. Discussion Papers.
  3. Fabrizio Zilibotti, 2005. "The Research Agenda: Fabrizio Zilibotti on the Equilibrium Dynamics of Policies and Institutions," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 7(1), November.
  4. Mathias Trabandt, 2006. "Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending," 2006 Meeting Papers, Society for Economic Dynamics 668, Society for Economic Dynamics.

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