Working Paper: NBER ID: w10262
Authors: Casey B. Mulligan
Abstract: Aggregate consumption Euler equations fit financial asset return data poorly. But they fit the return on the capital stock well, which leads us to three empirical findings relating to the capital income tax burden. First, capital taxation drives a wedge between consumption growth and the expected pre-tax capital return. Second, capital taxation is the major distortion in the capital market, in the sense that most of the medium and long run deviations between expected consumption growth and the expected pre-tax capital return are associated with capital taxation. Third, consumption growth appears to be pretty elastic to the after-tax capital return (i.e., capital is elastically supplied), even while it appears inelastic to returns on various financial assets. Capital income taxes are passed on through reduced capital accumulation, or higher markups, or some combination.
Keywords: No keywords provided
JEL Codes: E21; H30; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital taxation (H24) | consumption growth (E20) |
| capital taxation (H24) | expected pre-tax capital return (G31) |
| capital taxation (H24) | capital market distortions (G19) |
| expected pre-tax capital return (G31) | consumption growth (E20) |
| after-tax capital return (G31) | consumption growth (E20) |