Working Paper: NBER ID: w0951
Authors: Joel Slemrod
Abstract: This paper deals with the allocational effects and implications for efficiency of a tax system in which the rate of tax on capital income differs depending on the recipient of the income and on the type of capital producing the income. It suggests that, in their attempts to measure the distortionary effect of the U.S. capital income tax system, economists may have been looking in the wrong places. In the presence of uncertainty, the intersectoral distortion may be much less than had previously been imagined. However, the tax system distorts at two other margins which have not received much attention. It distorts the inter-household allocation of the housing stock, since the after-tax rate of interest is one component of the opportunity cost of owner-occupied housing. It also distorts the inter-household allocation of risk-bearing. Calculations using a simple commutable general equilibrium model suggest that the excess burden from these latter two distortions are significant components of the total distortionary impact of the tax system.
Keywords: capital income tax; allocational effects; efficiency implications; risk-bearing; housing allocation
JEL Codes: H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax system (H20) | interhousehold allocation of housing stock (R21) |
| tax system (H20) | interhousehold allocation of risk-bearing (G52) |
| distortions from tax system (H31) | total distortionary impact of the tax system (H21) |