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Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment

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  • Juan Carlos Conesa
  • Begona Dominguez

Abstract

Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an innitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 percent at steady state.

Suggested Citation

  • Juan Carlos Conesa & Begona Dominguez, 2018. "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment," Department of Economics Working Papers 18-10, Stony Brook University, Department of Economics.
  • Handle: RePEc:nys:sunysb:18-10
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    File URL: https://www.stonybrook.edu/commcms/economics/research/papers/2018/CapTaxRedist_1810.pdf
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    References listed on IDEAS

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    1. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
    2. Marco Bassetto, 2014. "Optimal fiscal policy with heterogeneous agents," Quantitative Economics, Econometric Society, vol. 5(3), pages 675-704, November.
    3. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    4. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
    5. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 767-796.
    6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    7. Roc Armenter, 2007. "Time-Consistent Fiscal Policy and Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 31-54, January.
    8. Andrew B. Abel, 2007. "Optimal Capital Income Taxation," NBER Working Papers 13354, National Bureau of Economic Research, Inc.
    9. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    10. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.
    11. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
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    Cited by:

    1. Juan Carlos Conesa & Begoña Domínguez, 2019. "The timing of optimal capital income tax reforms: the role of intangible capital investment," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 419-438, November.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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