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The Deadweight Loss from `Non-Neutral' Capital Income Taxation

  • Alan J. Auerbach

This paper develops an overlapping generations general equilibrium growth model with an explicit characterization of the role of capital goods in the production process. The model is rich enough in structure to evaluate and measure simultaneously the different distortions associated with capital income taxation (across sectors, across assets and across time) yet simple enough to yield intuitive analytical results as well. The main result is that uniform capital income taxation is almost certainly suboptimal, theoretically, but that empirically, optimal deviations from uniform taxation are inconsequential. We also find that though the gains from a move to uniform taxation are not large in absolute magnitude these gains would be offset only by an overall rise in capital income tax rates of several percentage points. A separate contribution of the paper is the development of a technique for distinguishing intergenerational transfers from efficiency gains in analyzing the effects of policy changes on long-run welfare.

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File URL: http://www.nber.org/papers/w2510.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2510.

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Date of creation: Feb 1988
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Publication status: published as Journal of Public Economics, Vol. 40, pp. 1-36, (1989).
Handle: RePEc:nbr:nberwo:2510
Note: PE
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