IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Machines, Buildings, and Optimal Dynamic Taxes

  • Hakki Yazici

    (Sabanci University)

  • Ctirad Slavik

    (Goethe University in Frankfurt)

The effective marginal tax rates on returns to capital assets show considerable amount of variation depending on the asset type in the U.S. corporate tax code. For instance, the effective marginal tax rate on the return to communications equipment is 19% whereas it is above 35% for non-residential buildings. This feature of the tax code has been the subject of a growing debate among policymakers, because it contributes to the existence of signicant gaps between the effective tax rates faced by companies in different industries. President Obama recently called for a reform to abolish the tax rules that create differential axation of capital assets in order to "level the playing field" across companies. In contrast to the extent of these policy debates, there has been little research on whether differential taxation of capital income based on capital type is a desirable feature of the tax code. In this paper, we take a step in this direction. Our theory confirms the optimality of differential capital asset taxation, but with an important caveat. Capital assets can be divided into two groups based on the tax treatment they receive in the U.S. tax code: structures and equipment. As documented by Gravelle (2011), in the current U.S. tax code the effective tax rate on equipment capital is on average 6% below the effective tax rate on structure capital. In contrast, our theory suggests that capital equipment should be taxed at a higher rate than capital structures. We conduct a quantitative exercise to assess the quantitative importance of optimal differential capital taxation. In our baseline calibration we find that the tax rate on capital equipments should be at least 19% higher than the tax rate on structure capital.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.economicdynamics.org/meetpapers/2013/paper_766.pdf
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 766.

as
in new window

Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:766
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  2. Florian Scheuer & Casey Rothschild, 2012. "Redistributive Taxation in a Roy Model," 2012 Meeting Papers 395, Society for Economic Dynamics.
  3. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1993. "Reassessing the Social Returns to Equipment Investment," NBER Working Papers 4405, National Bureau of Economic Research, Inc.
  4. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
  5. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  7. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  8. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," NajEcon Working Paper Reviews 391749000000000449, www.najecon.org.
  9. Emmanuel Farhi & Iv�n Werning, 2012. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 000 - 000.
  10. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1995. "Long-Run Implications of Investment-Specific Technological Change," UWO Department of Economics Working Papers 9510, University of Western Ontario, Department of Economics.
  11. Feldstein, Martin, 1990. "The Second Best Theory of Differential Capital Taxation," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 256-67, January.
  12. Kenichi Fukushima, 2010. "Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems," 2010 Meeting Papers 410, Society for Economic Dynamics.
  13. Slavik, Ctirad & Yazici, Hakki, 2014. "On the Consequences of Eliminating Capital Tax Differentials," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100479, Verein für Socialpolitik / German Economic Association.
  14. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 261-67, June.
  15. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers 4006, C.E.P.R. Discussion Papers.
  16. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc.
  17. Matthew Weinzierl & Aleh Tsyvinski & Mikhail Golosov, 2010. "Preference Heterogeneity and Optimal Capital Income Taxation," 2010 Meeting Papers 748, Society for Economic Dynamics.
  18. Mark Huggett & Gustavo Ventura & Amir Yaron, 2010. "Sources of Lifetime Inequality," Working Papers 2011-020, Human Capital and Economic Opportunity Working Group.
  19. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  20. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  21. Hui He & Zheng Liu, 2007. "Investment-specific technological change, skill accumulation, and wage inequality," Working Papers 644, Federal Reserve Bank of Minneapolis.
  22. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  23. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  24. Emmanuel Farhi, 2013. "Insurance and Taxation over the Life Cycle," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 596-635.
  25. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  26. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  27. Chris Papageorgiou & John Duffy & Fidel Perez-Sebastian, . "Capital-Skill complementarity? Evidence from a Panel of Countries," Departmental Working Papers 2003-12, Department of Economics, Louisiana State University.
  28. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  29. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers gueconwpa~06-06-11, Georgetown University, Department of Economics.
  30. Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper 06-13, Federal Reserve Bank of Richmond.
  31. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  32. Flug, K. & Hercowitz, Z., 1998. "Equipment Investment and the Relative Demand for Skilled Labour: International Evidence," Papers 05-98, Tel Aviv.
  33. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  34. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
  35. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  36. Gravelle, Jane G., 2011. "Reducing Depreciation Allowances To Finance A Lower Corporate Tax Rate," National Tax Journal, National Tax Association, vol. 64(4), pages 1039-53, December.
  37. Auerbach, Alan J, 1979. "The Optimal Taxation of Heterogeneous Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 589-612, November.
  38. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  39. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 925-967, 08.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed013:766. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.