Working Paper: NBER ID: w2510
Authors: Alan J. Auerbach
Abstract: This paper develops an overlapping generations general equilibrium growth model with an explicit characterization of the role of capital goods in the production process. The model is rich enough in structure to evaluate and measure simultaneously the different distortions associated with capital income taxation (across sectors, across assets and across time) yet simple enough to yield intuitive analytical results as well. The main result is that uniform capital income taxation is almost certainly suboptimal, theoretically, but that empirically, optimal deviations from uniform taxation are inconsequential. We also find that though the gains from a move to uniform taxation are not large in absolute magnitude these gains would be offset only by an overall rise in capital income tax rates of several percentage points. A separate contribution of the paper is the development of a technique for distinguishing intergenerational transfers from efficiency gains in analyzing the effects of policy changes on long-run welfare.
Keywords: capital income taxation; deadweight loss; general equilibrium; intergenerational transfers
JEL Codes: H21; H25; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uniform capital income taxation (H24) | economic inefficiencies (D61) |
| capital income taxation (H24) | distortions in capital allocation (D61) |
| differential taxation (H29) | welfare gains (D69) |
| tax policy changes (H29) | steady-state utility (D11) |
| uniform taxation (H29) | efficiency (D61) |
| tax changes (H26) | capital allocation (G31) |
| price changes of capital goods (E30) | consumption goods (E20) |