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Optimal Capital Taxation and Consumer Uncertainty

Author

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  • Justin Svec

    () (Department of Economics, College of the Holy Cross)

  • Ryan Chahrour

    () (Toulouse School of Economics, Boston College)

Abstract

This paper analyzes the impact of consumer uncertainty on optimal scal policy in a model with capital. The consumers lack con dence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-con dence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent. JEL Codes: E62, H21

Suggested Citation

  • Justin Svec & Ryan Chahrour, 2011. "Optimal Capital Taxation and Consumer Uncertainty," Working Papers 1108, College of the Holy Cross, Department of Economics.
  • Handle: RePEc:hcx:wpaper:1108
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    References listed on IDEAS

    as
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    Cited by:

    1. Baumann Robert & Svec Justin, 2016. "The Impact of Political Uncertainty: A Robust Control Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 837-863, April.
    2. Svec, Justin, 2012. "Optimal fiscal policy with robust control," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 349-368.

    More about this item

    Keywords

    Model uncertainty; capital income tax; public debt;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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