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Optimal tax policy under habit formation and capital utilization

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  • Monteiro, Goncalo
  • Cook, Adam
  • Dey, Sanjoy

Abstract

Our objective is to investigate, how the combination of habit formation with endogenous capital utilization decisions affects the process of economic growth. We find that in the presence of positive productivity growth, habit formation in consumption reduces the rate of capital utilization while increasing the long run stock of capital. We show in the Chamley–Judd result of zero income capital taxation is robust to the presence of endogenous capital utilization. The result even extends to the short-run as long as there are no depreciation allowances, but breaks if those are present. Our policy simulations show that steady state level of capital utilization is not affected by changes in income tax, but its reduced on impact to accommodate for the constance of capital stock Our numerical simulations also show important differences in the time adjustment followed by key variables, as a response to tax policy.

Suggested Citation

  • Monteiro, Goncalo & Cook, Adam & Dey, Sanjoy, 2013. "Optimal tax policy under habit formation and capital utilization," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 230-248.
  • Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:230-248
    DOI: 10.1016/j.jmacro.2013.03.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ghosh, Sugata & Wendner, Ronald, 2014. "Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation," MPRA Paper 60337, University Library of Munich, Germany.
    2. Inge van den Bijgaart, 2018. "Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy," CESifo Working Paper Series 6958, CESifo Group Munich.
    3. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.
    4. van den Bijgaart, I.M., 2017. "Too slow a change? Deep habits, consumption shifts and transitory tax," Working Papers in Economics 701, University of Gothenburg, Department of Economics.

    More about this item

    Keywords

    Habit formation; Capital utilization; Optimal taxation; Economic growth; User cost;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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