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Measuring the Efficiency Cost of Taxing Risky Capital Income

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Listed author(s):
  • Roger H. Gordon
  • John D. Wilson

Abstract

In this paper, we derive a measure of the efficiency cost of taxing risky capital income in an infinite horizon stochastic model. The resulting measure differs from all those that have been proposed in the existing literature. It can be represented by the expression -sigma(s) T(s)c(deltaX(s)), where T(s) measures the present value of the taxes that would be paid on a unit of investment in a riskless project with the same expected depreciation rate and tax treatment as capital invested in period s, X(s), while c(X(s)) represents the certainty equivalent to the representative individual of the lottery where measures the ex post change in investment in period s due to the tax change. The paper then compares this measure with others that have appeared in the literature. We were unable to find support for the argument in Bulow-Suinmers(1984) that the efficiency cost of taxing risky capital income is much larger than that implied by the measure -sigma(s)T(s)E(deltaX(s)). In fact, we show in special cases that our measure implies a smaller efficiency cost than does the measure -sigma(s)T(s)E(deltaX(s)).

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File URL: http://www.nber.org/papers/w1992.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1992.

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Date of creation: Aug 1986
Publication status: published as The American Economic Review, Vol. 79, No. 3, pp. 429-439, (June 1989).
Handle: RePEc:nbr:nberwo:1992
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  1. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "General Equilibrium Analysis of Tax Policies," NBER Chapters,in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24 National Bureau of Economic Research, Inc.
  2. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426 National Bureau of Economic Research, Inc.
  3. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  4. Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458 National Bureau of Economic Research, Inc.
  5. 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.
  6. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
  7. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
  8. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
  9. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
  10. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
  11. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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Cited by:

  1. Kwang Soo Cheong, 1997. "Corporate Income Taxation and Signaling," Working Papers 199713, University of Hawaii at Manoa, Department of Economics.
  2. Duanjie Chen & Guillermo Perry, 2010. "Mining Taxation in Colombia," DOCUMENTOS CEDE 012562, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. Randall Morck & Masao Nakamura, 2000. "Japanese Corporate Governance and Macroeconomic Problems," Harvard Institute of Economic Research Working Papers 1893, Harvard - Institute of Economic Research.
  4. Syed M. Ahsan & Panagiotis Tsigaris, 2009. "The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions," Public Finance Review, , vol. 37(6), pages 710-731, November.
  5. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
  6. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
  7. Devereux, Michael P., 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.
  8. Kenneth McKenzie & Jack Mintz, 1992. "Tax Effects on the Cost of Capital," NBER Chapters,in: Canada-U.S. Tax Comparisons, pages 189-216 National Bureau of Economic Research, Inc.
  9. Pierre-Pascal Gendron & Gordon Anderson & Jack M. Mintz, 2003. "Corporation Tax Asymmetries and Firm-Level Investment in Canada," International Tax Program Papers 0303, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  10. Lans Bovenberg & Krister Anderson & Kenji Aramaki & Sheetal K. Chand, 1990. "Tax Incentives and International Capital Flows: The Case of the United States and Japan," NBER Chapters,in: Taxation in the Global Economy, pages 283-328 National Bureau of Economic Research, Inc.
  11. Bob Hamilton & Jack Mintz & John Whalley, 1991. "Decomposing the Welfare Costs of Capital Tax Distortions: The Importance of Risk Assumptions," NBER Working Papers 3628, National Bureau of Economic Research, Inc.
  12. Katharina Finke & Jost H. Heckemeyer & Timo Reister & Christoph Spengel, 2013. "Impact of Tax-Rate Cut cum Base-Broadening Reforms on Heterogeneous Firms: Learning from the German Tax Reform of 2008," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 72-114, March.
  13. Lund, Diderik, 2009. "Marginal versus Average Beta of Equity under Corporate Taxation," Memorandum 12/2009, Oslo University, Department of Economics.
  14. Kalina Koleva, 2005. "A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience," Cahiers de la Maison des Sciences Economiques r05050, Université Panthéon-Sorbonne (Paris 1).
  15. 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.
  16. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  17. Patric H. Hendershott, 1987. "Tax Reform and the Slope of the Playing Field," NBER Chapters,in: Taxes and Capital Formation, pages 51-62 National Bureau of Economic Research, Inc.
  18. Santoro, Marika & Wei, Chao, 2013. "The marginal welfare cost of capital taxation: Discounting matters," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 897-909.

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