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Approaches to efficient capital taxation : Leveling the playing field vs. living by the golden rule

  • Goulder, Lawrence H.
  • Thalmann, Philippe

In this paper we explore the efficiency gains from the Tax Reform Act of 1986 and prospective tax reforms, separating out the intersectoral and intertemporal efficiency consequences. To assess these effects, we employ a general equilibrium model that considers the effects of taxes on the allocation of capital across industries, assets, sectors, and time. We find that the 1986 tax reform yielded only a small improvement in the intersectoral allocation of capital because the beneficial effects from its more uniform treatment of capital within the business sector are largely offset by adverse effects stemming from increased tax disparities between the business and housing sectors. The intertemporal efficiency effects of the reform, in contrast, are significant and negative. Hence the overall efficiency impact of the reform is negative as well. Our results indicate that the economic margins offering the greatest scope for efficiency gains are different from those that received the most attention under the 1986 tax reform. While much of the 1986 reform concentrated on reducing tax disparities within the business sector, much larger efficiency gains would result from reducing tax disparities between the business and housing sectors and from general reductions in effective marginal tax rates on capital.

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

Volume (Year): 50 (1993)
Issue (Month): 2 (February)
Pages: 169-196

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Handle: RePEc:eee:pubeco:v:50:y:1993:i:2:p:169-196
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Jane G. Gravelle & Laurence J. Kotlikoff, 1989. "Corporate Taxation and the Efficiency Gains of the 1986 Tax Reform Act," NBER Working Papers 3142, National Bureau of Economic Research, Inc.
  2. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1989. "A Disaggregate Equilibrium Model of the Tax Distortions among Assets, Sectors, and Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 391-413, May.
  3. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
  4. Lawrence H. Goulder, 1989. "Tax Policy, Housing Prices, and Housing Investment," NBER Working Papers 2814, National Bureau of Economic Research, Inc.
  5. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
  6. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  7. James M. Poterba & Lawrence A. Summers, 1984. "New Evidence that Taxes Affect the Valuation of Dividends," Working papers 338, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
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  10. Bovenberg, A.L., 1988. "The corporate tax in an intertemporal equilibrium model with imperfectly mobile capital," Other publications TiSEM feff37fb-c981-45fa-b2d8-7, Tilburg University, School of Economics and Management.
  11. Jorgenson, Dale W & Yun, Kun-Young, 1986. " The Efficiency of Capital Allocation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 85-107.
  12. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-78, Winter.
  13. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
  14. J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 151-174.
  15. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
  16. Don Fullerton & Andrew B. Lyon, 1987. "Tax Neutrality and Intangible Capital," NBER Working Papers 2430, National Bureau of Economic Research, Inc.
  17. Bovenberg, Arij Lans, 1988. "The Corporate Income Tax in an Intertemporal Equilibrium Model with Imperfectly Mobil Capitla," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 321-40, May.
  18. Robert M. Buckley & John Simonson, 1987. "Effective Property Tax Rates and Capital Formation Issues: Manvel, Acton and Darby," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 725-738.
  19. Goulder, Lawrence H., 1989. "Tax policy, housing prices, and housing investment," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 281-304, May.
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