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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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File URL: https://www.econstor.eu/bitstream/10419/79951/1/VfS_2013_pid_67.pdf
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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
Handle: RePEc:zbw:vfsc13:79951
Contact details of provider: Web page: http://www.socialpolitik.org/
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