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Capital Taxation In A Simple Finite-Horizon Olg Model

  • Blackorby, Charles

    (Department of Economics, University of Warwick and GREQAM)

  • Brett, Craig

    (Department of Economics, Mount Allison University)

In a simple finite-horizon overlapping-generations model where the government has the power to levy commodity taxes and to implement uniform lump-sum transfers, and individuals as well as the government can purchase units of a storable good in order to transfer resources from the present to the future, we derive the equations that implicitly define the taxes and subsidies that are part of the second-best Pareto optima. In this context we first show that there is production efficiency. We then show that taxes on capital income/savings are required at almost all Pareto optima. Finally we show that there are no restriction on preferences or technologies that are consistent with a general exemption of capital income/savings from the tax base.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp709.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 709.

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Length: 25 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:wrk:warwec:709
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. Martin Feldstein, 1985. "The Second Best Theory of Differential Capital Taxation," NBER Working Papers 1781, National Bureau of Economic Research, Inc.
  2. Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc.
  3. Diewert, W. E. & Avriel, M. & Zang, I., 1981. "Nine kinds of quasiconcavity and concavity," Journal of Economic Theory, Elsevier, vol. 25(3), pages 397-420, December.
  4. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  5. Alan J. Auerbach & James R. Hines Jr., 2001. "Taxation and Economic Efficiency," NBER Working Papers 8181, National Bureau of Economic Research, Inc.
  6. Guesnerie Roger, 1976. "On the direction of tax reform," CEPREMAP Working Papers (Couverture Orange) 7603, CEPREMAP.
  7. Auerbach, Alan J., 1989. "The deadweight loss from `non-neutral' capital income taxation," Journal of Public Economics, Elsevier, vol. 40(1), pages 1-36, October.
  8. Browning, Martin & Burbidge, John, 1990. "Consumption and Income Taxation," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 281-92, January.
  9. Kenneth L. Judd, 1984. "The Welfare Cost of Factor Taxation in a Perfect Foresight Model," Discussion Papers 643, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. repec:cup:cbooks:9780521497695 is not listed on IDEAS
  11. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  12. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
  13. Blackorby, Charles & Diewert, W E, 1979. "Expenditure Functions, Local Duality, and Second Order Approximations," Econometrica, Econometric Society, vol. 47(3), pages 579-601, May.
  14. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  15. Diewert, W. E., 1978. "Optimal tax perturbations," Journal of Public Economics, Elsevier, vol. 10(2), pages 139-177, October.
  16. Weymark, John A., 1979. "A reconciliation of recent results in optimal taxation theory," Journal of Public Economics, Elsevier, vol. 12(2), pages 171-189, October.
  17. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. B. Douglas Bernheim, 1999. "Taxation and Saving," Working Papers 99007, Stanford University, Department of Economics.
  19. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  20. 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.
  21. Alan J. Auerbach, 1990. "Public Sector Dynamics," NBER Working Papers 3508, National Bureau of Economic Research, Inc.
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