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The Capital Levy in Theory and Practice

  • Barry Eichengreen

A capital levy is a one-time tax on all wealth holders with the goal of retiring public debt. This paper reconsiders the historical debate over the capital levy in a contingent capital taxation framework. This shows how in theory the imposition of a levy can be welfare improving when adopted to redress debt problems created by special circumstances, even if its nonrecurrence cannot be guaranteed. If the contingencies in response to which the levy is imposed are fully anticipated, independently verifiable and not under government control, then saving and investment should not fall following the imposition of the levy, nor should the government find it more difficult to raise revenues subsequently. In practice, serious problems stand in the way of implementation. A capital levy has profound distribution consequences. Property owners are sure to resist its adoption. In a democratic society, their objections are guaranteed to cause delay. This provides an opportunity for capital flight, reducing the prospective yield, and allows the special circumstances providing the justification for the levy to recede in the past. The only successful levies occur in cases like post-World War II Japan, where important elements of the democratic process are suppressed and where the fact that the levy was imposed by an outside power minimized the negative impact on the reputation of subsequent sovereign governments.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3096.

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Date of creation: Sep 1989
Date of revision:
Publication status: published as Public Debt Management: Theory and History, edited by Dornbusch and Dreghi , pp. 191-220. New York: Cambridge University Press, 1990.
Handle: RePEc:nbr:nberwo:3096
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
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  1. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  2. Herschel I. Grossman, 1988. "The Political Economy of War Debts and Inflation," NBER Working Papers 2743, National Bureau of Economic Research, Inc.
  3. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 13-38, January.
  4. Henry Shavell, 1948. "Postwar Taxation in Japan," Journal of Political Economy, University of Chicago Press, vol. 56, pages 124.
  5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
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  7. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
  8. V. V. Chari, 1988. "Time consistency and optimal policy design," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-31.
  9. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  10. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
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