Working Paper: NBER ID: w1992
Authors: Roger H. Gordon; John D. Wilson
Abstract: In this paper, we derive a measure of the efficiency cost of taxing risky capital income \nin an infinite horizon stochastic model. The resulting measure differs from all those that \nhave been proposed in the existing literature. It can be represented by the expression \n-sigma(s) T(s)c(deltaX(s)), where T(s) measures the present value of the taxes that would be paid on a unit of investment in a riskless project with the same expected depreciation rate and tax treatment as capital invested in period s, X(s), while c(X(s)) represents the certainty equivalent to the representative individual of the lottery where measures the ex post change in investment in period s due to the tax change. The paper then compares this measure with others that have appeared in the literature. \nWe were unable to find support for the argument in Bulow-Suinmers(1984) that the efficiency cost of taxing risky capital income is much larger than that implied by the measure -sigma(s)T(s)E(deltaX(s)). In fact, we show in special cases that our measure implies a smaller efficiency cost than does the measure -sigma(s)T(s)E(deltaX(s)).
Keywords: Taxation; Capital Income; Efficiency Cost; Risk
JEL Codes: H21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| present value of taxes on a unit of investment in a riskless project (H43) | efficiency cost of taxing risky capital income (H21) |
| certainty equivalent of the representative individual's lottery (D81) | efficiency cost of taxing risky capital income (H21) |
| tex (measure of efficiency cost) (D61) | efficiency cost of taxing risky capital income (H21) |
| tax law allowing for ex post depreciation deductions (H20) | efficiency cost of taxing corporate income (H21) |
| infinite horizon model (D15) | efficiency costs of taxing risky capital income (H21) |
| two-period models (C41) | efficiency costs of taxing risky capital income (H21) |
| stochastic nature of future investment rates (G17) | efficiency cost of taxing risky capital income (H21) |