Working Paper: CEPR ID: DP4731
Authors: John Hassler; Per Krusell; Kjetil Storesletten; Fabrizio Zilibotti
Abstract: This Paper analyses the optimal timing of taxes on capital income. We show that the celebrated result that taxes should front-loaded with an initially high tax followed by a discrete jump to the steady state is knife-edge, hinging on capital having a constant depreciation rate. An empirically supported deviation from this case, involving depreciation rates that increase over the lifespan of the investment, implies that optimal taxes should oscillate. Furthermore, the optimality of fluctuating tax rates hinges on the government being able to commit to the path of future tax rates. Without commitment, optimal taxes may be smooth also under accelerating depreciation. In a calibrated example, we find that optimal taxes are oscillating under commitment and smooth without commitment.
Keywords: capital; depreciation; optimal taxation; tax dynamics; time consistency
JEL Codes: D90; E61; H21; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal tax rate fluctuations based on capital depreciation rates (H21) | higher initial tax rates should be followed by lower rates (H21) |
| lack of government commitment (H11) | less fluctuation in tax rates (H29) |
| non-constant depreciation rates (D25) | optimal tax sequence sensitivity (H21) |
| absence of commitment (J22) | tendency for taxes to be less fluctuating (H31) |