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Optimal capital taxation for time-nonseparable preferences

  • Moritz Kuhn

    (University of Bonn)

  • Sebastian Koehne

    (Stockholm University)

We study optimal capital taxation in a dynamic Mirrleesian model with time-nonseparable preferences. The model covers the widely used cases of habit formation and durable consumption. Time-nonseparable preferences change labor supply incentives across time and thereby generate novel motives to distort capital accumulation decisions. We decompose intertemporal wedges (implicit capital taxes) into three components and provide conditions under which intertemporal wedges are positive. We derive a recursive formulation of constrained efficient allocations and evaluate the quantitative importance of habit formation for intertemporal wedges. In our baseline parameterization, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 322.

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Date of creation: 2013
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Handle: RePEc:red:sed013:322
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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