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On the optimal timing of capital taxes

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

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 4 (May)
Pages: 692-709

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Handle: RePEc:eee:moneco:v:55:y:2008:i:4:p:692-709
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Stephen D. Oliner, 1993. "New evidence on the retirement and depreciation of machine tools," Working Paper Series / Economic Activity Section 147, Board of Governors of the Federal Reserve System (U.S.).
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  7. Marcus Hagedorn, 2007. "Optimal Ramsey Tax Cycles," IEW - Working Papers 354, Institute for Empirical Research in Economics - University of Zurich.
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  9. Hassler, John & Storesletten, Kjetil & Zilibotti, Fabrizio, 2007. "Democratic public good provision," Journal of Economic Theory, Elsevier, vol. 133(1), pages 127-151, March.
  10. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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  12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  13. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 338-369, August.
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