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The taxation of capital returns in overlapping generations economies without Financial assets

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  • Davila, Julio

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)
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Abstract

I show in this paper that in an overlapping generations economy with production à la Diamond (1970) in which the agents can only save in terms of capital (i.e. with no asset bubbles à la Tirole (1985) or public debt as in Diamond (1965)), there is a period-by- period balanced fiscal policy supporting a steady state allocation that Pareto-improves upon the laissez-faire competitive equilibrium steady state (without having to resort to intergenerational transfers) if there is no first generation or the economy starts there. A transition from the competitive equilibrium steady state to this other allocation is also Pareto-improving if the former is dynamically inefficient, but even in the dynamically effcient case if the elasticity of output to capital is high enough. This intervention allows every subsequent generation to attain, as a competitive equilibrium outcome, the highest utility attainable at a steady state through the existing markets for the consumption good and the production factors. The active fiscal policy consists of taxing (or subsidizing, in the dynamically efficient case) linearly the returns to capital, while balancing the budget period by period through a lump-sum transfer (or tax, respectively) on second period income. This policy does not finance any public spending, since there is none in the model. The only purpose of the intervention is to decentralize as a competitive equilibrium the steady state allocation that maximizes the utility of the representative agent among all steady state allocations attainable through the existing markets.

Suggested Citation

  • Davila, Julio, 2008. "The taxation of capital returns in overlapping generations economies without Financial assets," CORE Discussion Papers 2008075, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2008075
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2008_75.pdf
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    1. repec:hal:journl:halshs-00441906 is not listed on IDEAS
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    More about this item

    Keywords

    taxation of capital; overlapping generations.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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