A Note on Optimal Capital Taxation With Preference Externalities

Abstract

This paper extends the Chamley–Judd framework by introducing preference externalities in a neoclassical growth model, and finds that the optimal capital tax increases with the extent of social-status seeking or negative leisure externalities. Furthermore, this paper finds that differences in leisure externalities lead to a distinct impact on optimal factor income taxes, and hence may serve as a plausible vehicle to explain the empirical differences in factor income taxation in the United States and Europe.

Industrial structure and economic performance: The role of productive public expenditure

“…Our numerical results are robust to the choice of ε within the reasonable range, and we thus fix ε at 2, as used by Huang and Meng (). The rate of time preference is set to ρ = 0.04, a fairly conventional choice in the literature (see, for instance, Kydland & Prescott, ; Chang & Lai, ). As documented by Getachew and Turnovsky (), the output elasticity of public goods lies within the range from 0.2 to 0.4, which covers most of the plausible values parameterized by Eden and Kraay ().…”