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The Welfare Cost of Capital Taxation: An Asset Market Approach (Working Paper 2011-03)

  • Marika Santoro
  • Chao Wei

We use an asset pricing perspective to provide a novel interpretation of the marginal welfare cost of capital income taxes. We show that the marginal welfare cost can be interpreted as the normalized present discounted value of consumption distortions from capital income taxes. Such an interpretation emphasizes the importance of the discount rate used to value future consumption distortions, especially in the presence of uncertainty. We find that the discount rate decreases as the capital income tax rate increases, thus increasing the welfare cost of taxes. The variations in the discount rate

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Paper provided by Congressional Budget Office in its series Working Papers with number 41152.

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Date of creation: 17 Aug 2011
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Handle: RePEc:cbo:wpaper:41152
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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
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  8. Bernheim, B Douglas, 1981. "A Note on Dynamic Tax Incidence," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 705-23, November.
  9. 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.
  10. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  11. Lai, Tsong-Yue, 1989. "An Equilibrium Model of Asset Pricing with Progressive Personal Taxes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 117-127, March.
  12. Chang, Ly-June, 1995. "Business cycles with distorting taxes and disaggregated capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 985-1009.
  13. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  14. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  15. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  16. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  17. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  18. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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