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Intertemporally Dependent Preferences and the Welfare Cost of Capital Income Taxation

  • Muhammad Islam
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    The welfare cost of capital income taxation is analyzed utilizing intertemporally dependent preference operationalized using a variable rate of time preference. It is shown that if households exhibit increasing marginal impatience, then the welfare cost of capital income taxation is inversely related to the elasticity of the rate of time preference with respect to consumption. Therefore, the welfare cost of capital income taxation reported using time additive preferences may not be robust. Numerical examples show that the use of time additive preferences could result in the welfare cost of capital income taxation to be overestimated by as much as 25%. Copyright Kluwer Academic Publishers 1998

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    File URL: http://hdl.handle.net/10.1023/A:1008646722661
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    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 5 (1998)
    Issue (Month): 4 (October)
    Pages: 489-498

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    Handle: RePEc:kap:itaxpf:v:5:y:1998:i:4:p:489-498
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    1. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
    2. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    3. 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.
    4. Bergman, Yaacov Z., 1985. "Time preference and capital asset pricing models," Journal of Financial Economics, Elsevier, vol. 14(1), pages 145-159, March.
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    6. Christophe Chamley, 1980. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Cowles Foundation Discussion Papers 553, Cowles Foundation for Research in Economics, Yale University.
    7. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    8. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    9. Calvo, Guillermo & Findlay, Ronald, 1978. "On the optimal acquisition of foreign capital through investment of oil export revenues," Journal of International Economics, Elsevier, vol. 8(4), pages 513-524, November.
    10. Chamley, Christophe, 1985. "Efficient Tax Reform in a Dynamic Model of General Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 335-56, May.
    11. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-35, August.
    12. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Growth with Many Consumers," Discussion Papers 518, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Findlay, Ronald, 1978. "An "Austrian" Model of International Trade and Interest Rate Equalization," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 989-1007, December.
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    16. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February.
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