IDEAS home Printed from https://ideas.repec.org/p/red/sed013/766.html
   My bibliography  Save this paper

Machines, Buildings, and Optimal Dynamic Taxes

Author

Listed:
  • Hakki Yazici

    (Sabanci University)

  • Ctirad Slavik

    (Goethe University in Frankfurt)

Abstract

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.

Suggested Citation

  • Hakki Yazici & Ctirad Slavik, 2013. "Machines, Buildings, and Optimal Dynamic Taxes," 2013 Meeting Papers 766, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:766
    as

    Download full text from publisher

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

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rodney D. Ludema & Taizo Takeno, 2007. "Tariffs and the adoption of clean technology under asymmetric information," Canadian Journal of Economics, Canadian Economics Association, pages 1100-1117.
    2. 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.
    3. Harold L. Cole & Narayana R. Kocherlakota, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Oxford University Press, pages 523-542.
    4. Karnit Flug & Zvi Hercowitz, 2000. "Equipment Investment and the Relative Demand for Skilled Labor: International Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 461-485, July.
    5. 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.
    6. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, January.
    7. Hui He & Zheng Liu, 2008. "Investment-Specific Technological Change, Skill Accumulation, and Wage Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 314-334, April.
    8. Alan J. Auerbach, 1979. "The Optimal Taxation of Heterogeneous Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 589-612.
    9. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
    10. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, pages 569-587.
    11. Grochulski, Borys & Piskorski, Tomasz, 2010. "Risky human capital and deferred capital income taxation," Journal of Economic Theory, Elsevier, vol. 145(3), pages 908-943, May.
    12. Mark Huggett & Juan Carlos Parra, 2010. "How Well Does the U.S. Social Insurance System Provide Social Insurance?," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 76-112, February.
    13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    14. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2010. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 681-722, August.
    15. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1994. "Reassessing the Social Returns to Equipment Investment," The Quarterly Journal of Economics, Oxford University Press, pages 789-802.
    16. 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, May.
    17. John Duffy & Chris Papageorgiou & Fidel Perez-Sebastian, 2004. "Capital-Skill Complementarity? Evidence from a Panel of Countries," The Review of Economics and Statistics, MIT Press, pages 327-344.
    18. 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, pages 165-188.
    19. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, pages 342-362.
    20. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, pages 203-235.
    21. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 925-967.
    22. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, pages 2923-2954.
    23. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, pages 609-633.
    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. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, pages 1491-1518.
    26. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, pages 609-633.
    27. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
    28. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, pages 59-83.
    29. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, pages 55-75.
    30. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, pages 2923-2954.
    31. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    32. Feldstein, Martin, 1990. "The Second Best Theory of Differential Capital Taxation," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 256-267, January.
    33. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    34. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, pages 261-278.
    35. Gravelle, Jane G., 2011. "Reducing Depreciation Allowances to Finance a Lower Corporate Tax Rate," National Tax Journal, National Tax Association, pages 1039-1053.
    36. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, pages 8-27.
    37. 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.
    38. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 261-267.
    39. 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.
    40. Ivan Werning & Emmanuel Farhi, 2009. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," 2009 Meeting Papers 1262, Society for Economic Dynamics.
    41. Emmanuel Farhi & Iván Werning, 2012. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 000.
    42. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, pages 213-240.
    43. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, pages 213-240.
    44. Florian Scheuer & Casey Rothschild, 2012. "Redistributive Taxation in a Roy Model," 2012 Meeting Papers 395, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Laurence Ales & Antonio Andres Bellofatto & Jessie Jiaxu Wang, 2017. "Taxing Atlas: Executive Compensation, Firm Size and Their Impact on Optimal Top Income Tax Rates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 62-90, October.
    2. Laurence Ales & Kurnaz Musab & Sleet Christopher, "undated". "Task, Talent, and Taxes," GSIA Working Papers 2014-E16, Carnegie Mellon University, Tepper School of Business.
    3. Laurence Ales & Kurnaz Musab & Sleet Christopher, "undated". "Task, Talent, and Taxes," GSIA Working Papers 2014-E16, Carnegie Mellon University, Tepper School of Business.
    4. 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.
    5. Froemel, M. & Gottlieb, C., 2016. "The Earned Income Tax Credit: Targeting the Poor but Crowding Out Wealth," Cambridge Working Papers in Economics 1651, Faculty of Economics, University of Cambridge.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.