What does the capital income tax distort?
In addition to taxing future consumption (including leisure), capital income taxation subsidizes the consumption of durables. the taxation of future consumption may be characterized as an intertemporal distortion, while the subsidy to durables may be characterized as a static distortion. the magnitude of this intertemporal distortion has received considerable attention, but few analyses have dealt with the static distortion. ; This paper decomposes the excess burden arising from capital income taxation into its static and intertemporal components. the analysis is based on a life-cycle model with a constant elasticity of substitution utility function in one durable and one nondurable good. Calculations indicate that for reasonable utility parameters, the static component of the excess burden is of the same order of magnitude as the intertemporal component. in the case of major durable goods such as housing, which have relatively low depreciation rates, the static component is large and may exceed the intertemporal component. This suggests that an additional tax on the purchase of new durable goods would significantly reduce the overall excess burden arising from a capital income tax.
|Date of creation:||1990|
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert E. Hall, 1981.
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NBER Working Papers
0720, National Bureau of Economic Research, Inc.
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NBER Working Papers
0819, National Bureau of Economic Research, Inc.
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- Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, October.
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in: Research in Taxation, pages 29-51
National Bureau of Economic Research, Inc.
- 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.
- Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June.
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