Accounting for the "disconnectedness" of the economy in OLG models: A case for taxing capital income
The paper extends the works by Judd [K.L. Judd, Redistributive Taxation in a Simple Perfect Foresight Model, J. Public Econ. 28 (1985), 59-83.] and Chamley [C. Chamley, Optimal taxation of capital income in general equilibrium with infinite lives, Econometrica, 54 (1986), 607-622.], who establish that in the long run the capital income tax should be zero, by considering a discrete time version of the Blanchard-Buiter-Weil perpetual youth model. We show that an independent source of non-zero taxation arises whenever the economy is "disconnected" and this feature is properly taken into account by the policymaker. More precisely, if the weight attached to each cohort in the social welfare function equals the corresponding actual share in the population, there is a force pushing towards positive taxation of capital income, which acts as a Pigouvian intervention. Moreover, room for this intertemporal correction shrinks as the relative weight of a cohort tends to zero: thus, the optimal tax rate decreases with age and tends to zero for the oldest. We also show that our result depends neither on life-cycle behavior, as pointed out by the previous literature on OLG models, nor on population growth.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Caplin & John Leahy, 2001.
"The social discount rate,"
Discussion Paper / Institute for Empirical Macroeconomics
137, Federal Reserve Bank of Minneapolis.
- Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-549, September.
- Erosa, Andres & Gervais, Martin, 2002.
"Optimal Taxation in Life-Cycle Economies,"
Journal of Economic Theory,
Elsevier, vol. 105(2), pages 338-369, August.
- Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
- Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
- Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
- Emmanuel Farhi & Ivan Werning, 2005.
"Inequality, Social Discounting and Estate Taxation,"
NBER Working Papers
11408, National Bureau of Economic Research, Inc.
- Ivan Werning & Emmanuel Farhi, 2005. "Inequality, Social Discounting and Estate Taxation," 2005 Meeting Papers 358, Society for Economic Dynamics.
- De Bonis, Valeria & Spataro, Luca, 2005. "Taxing Capital Income As Pigouvian Correction: The Role Of Discounting The Future," Macroeconomic Dynamics, Cambridge University Press, vol. 9(04), pages 469-477, September.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-247, April.
- Kenneth L. Judd, 1982.
"Redistributive Taxation in a Simple Perfect Foresight Model,"
572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
- Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-293, June.
- de la Croix,David & Michel,Philippe, 2002.
"A Theory of Economic Growth,"
Cambridge University Press, number 9780521806428, December.
- MICHEL, Philippe, 1990. "Criticism of the social time-preference hypothesis in optimal growth," CORE Discussion Papers 1990039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
- B. Douglas Bernheim, 1989. "Intergenerational Altruism, Dynastic Equilibria and Social Welfare," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 119-128.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:25:y:2008:i:3:p:411-421. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.