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Optimal state-contingent capital taxation: when is there an indeterminacy?

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  • Bohn, Henning

Abstract

Several recent papers on dynamically optimal taxation have derived an indeterminacy result regarding state-contingent capital taxation in stochastic models with state-contingent government liabilities. The indeterminacy arises because the government has N degrees of freedom to set tax rates on capital income in N states of nature, only subject to a single constraint that assures an optimal level of capital investment. The paper shows that this indeterminacy result is a consequence of the assumption that the economy has only a single production technology. If there are many technologies, there will be additional constraints, because differences in capital income tax rates in different states of nature will create incentives to invest in those technologies that have high payoffs in states with relatively low tax rates. If there are a large number of technologies, both the structure of capital tax rates and the structure of government debt are tied down in many dimensions.
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  • Bohn, Henning, 1994. "Optimal state-contingent capital taxation: when is there an indeterminacy?," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 125-137, August.
  • Handle: RePEc:eee:moneco:v:34:y:1994:i:1:p:125-137
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    Cited by:

    1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    2. Baltasar Manzano & Jess Ruz, 2000. "Optimal Fiscal Policy In A Business Cycle Model: Alternative Identifications Of The Optimal Expost Capital Income Tax Rates," Computing in Economics and Finance 2000 351, Society for Computational Economics.
    3. Baltasar Manzano & Jesús Ruiz, 2004. "Política fiscal óptima: el estado de la cuestión," Investigaciones Economicas, Fundación SEPI, vol. 28(1), pages 5-41, January.
    4. Ghada Abbas, 2006. "Gestion de la dette publique et lissage des taux d’imposition," CAE Working Papers 46, Aix-Marseille Université, CERGAM.
    5. Henning Bohn, 2001. "Retirement Savings in an Aging Society: A Case for Innovative Government Debt Management," CESifo Working Paper Series 494, CESifo Group Munich.
    6. Kevin J. Lansing, 1994. "Optimal fiscal policy when public capital is productive: a business- cycle perspective," Working Paper 9406, Federal Reserve Bank of Cleveland.
    7. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
    8. Jean-Louis COMBES & Tahsin SAADI SEDIK, 2002. "How does Trade openness Influence Budget Deficits?," Working Papers 200209, CERDI.

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