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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
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  1. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
  2. Narayana Kocherlakota, 2004. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 122247000000000729, UCLA Department of Economics.
  3. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
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  8. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  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.
  10. Sebastian Koehne & Nicola Pavoni & Arpad Abraham, 2011. "Optimal Income Taxation with Asset Accumulation," 2011 Meeting Papers 1161, Society for Economic Dynamics.
  11. Emmanuel Farhi & Iván Werning, 2008. "Optimal Savings Distortions with Recursive Preferences," NBER Working Papers 13720, National Bureau of Economic Research, Inc.
  12. Narayana Kocherlakota & Borys Grochulski, 2008. "Nonseparable Preferences and Optimal Social Security Systems," 2008 Meeting Papers 16, Society for Economic Dynamics.
  13. Illoong Kwon, 2006. "Incentives, wages, and promotions: theory and evidence," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 100-120, 03.
  14. Veronica Rappoport & Enrichetta Ravina & Daniel Paravisini, 2010. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," 2010 Meeting Papers 664, Society for Economic Dynamics.
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  16. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  17. 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.
  18. Martin S. Eichenbaum & Lars Peter Hansen, 1987. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," NBER Working Papers 2181, National Bureau of Economic Research, Inc.
  19. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  20. Hugo H. Hopenhayn & Arantxa Jarque, 2009. "Unobservable Persistant Productivity and Long Term Contracts," Economics Working Papers we092717, Universidad Carlos III, Departamento de Economía.
  21. Arantxa Jarque, 2005. "Repeated Moral Hazard with Effort Persistence," 2005 Meeting Papers 428, Society for Economic Dynamics.
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  23. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-85, March.
  24. repec:rje:randje:v:37:y:2006:1:p:100-120 is not listed on IDEAS
  25. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  26. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
  27. Daniel Paravisini & Veronica Rappoport & Enrichetta Ravina, 2010. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," NBER Working Papers 16063, National Bureau of Economic Research, Inc.
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