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Optimal capital taxation for time-nonseparable preferences

  • Koehne, Sebastian
  • Kuhn, Moritz

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 Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79951.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79951
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2055-2077, November.
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  4. Farhi, Emmanuel & Werning, Iván, 2008. "Optimal savings distortions with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 21-42, January.
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  8. Díaz, Antonia & Ríos Rull, José Víctor & Pijoan Mas, Josep, 2001. "Habit formation: implications for the wealth distribution," UC3M Working papers. Economics we015114, Universidad Carlos III de Madrid. Departamento de Economía.
  9. Clark, Andrew E., 1999. "Are wages habit-forming? evidence from micro data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 179-200, June.
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  18. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  19. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
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  25. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  26. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-85, March.
  27. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
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