The Welfare Cost of Capital Income Taxation in a Growing Economy

Chamley, Christophe

doi:10.1086/260981

Cited by 157 publications

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“…A standard result in the optimal taxation literature is that capital income should not be taxed in steady state, see Chamley (1981). We have also found that the capital tax is the most costly tax in a steady state characterized by perfect competition.…”

Section: Discussionsupporting

confidence: 50%

“…Table 3 shows the welfare cost of distortionary taxes under perfect competition and under the current level of competition in the product and labor markets. In previous studies on the welfare cost of taxation the analysis has been performed in models with perfect competition, see for example Chamley (1981), Jonsson and Klein (2003) and McGrattan (1994). We show that the welfare cost of taxes is underestimated if the degree of competition is not taken into account.…”

Section: Quantitative Analysis 41 Comparative Steady State Analysismentioning

confidence: 84%

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The welfare cost of imperfect competition and distortionary taxation

Jönsson

2007

Review of Economic Dynamics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. The papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments. Terms of use: Documents inThe views expressed in Working Papers are solely the responsibility of the authors and should not to be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank. AbstractThe welfare cost of imperfect competition in the product and labor market as well as distortionary taxation is quantified in a dynamic general equilibrium model parameterized to fit the U.S. economy. We find that the welfare cost of imperfect competition in the product market is 35.74 percent while it is 0.66 percent in the labor market, taking the transition from the distorted to the optimal steady state into account. If we also take into account that the U.S. economy is characterized by distortionary taxation the welfare cost in the product market increases to 48.26 percent and 4.70 percent in the labor market.

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Section: Discussionsupporting

confidence: 50%

Section: Quantitative Analysis 41 Comparative Steady State Analysismentioning

confidence: 84%

The welfare cost of imperfect competition and distortionary taxation

Jönsson

2007

Review of Economic Dynamics

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“…See Chamley (1981) for an example of a comparative statics analysis or Judd (1987) for differences in unanticipated and anticipated changes in factor taxes. In addition, there have been studies in stochastic set-ups, like Cooley and Hansen (1992).…”

Section: Motivationmentioning

confidence: 99%

Anticipation, learning and welfare: the case of distortionary taxation

Gasteiger¹,

Zhang

2014

Journal of Economic Dynamics and Control

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We study the impact of anticipated fiscal policy changes in the Ramsey economy when agents form expectations using adaptive learning. We extend the existing framework by distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour. Moreover, we demonstrate that this behaviour can have important implications for the welfare consequences of fiscal reforms. JEL Classification: E32, E62, D84Keywords: Fiscal Policy, Adaptive Learning, Oscillations c 2011 by Emanuel Gasteiger and Shoujian Zhang. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including c notice, is given to the source.$ We are indebted to Alejandro Cuñat, Robert Kunst and Gerhard Sorger for sound supervision and patience. We are also grateful to Szabolcs Deák, Seppo Honkapohja, Torsten Lisson, Paul Pichler and Monika Turyna as well as the participants at the 4th RGS Doctoral Conference in Economics, the 2011 Annual Conference of the Scottish Economic Society and the Quantitative Economics Doctorate (QED) Jamboree 2011 for valuable comments. All remaining errors are the responsibility of the authors. Leeper et al. (2009) is another good example of empirical evidence of fiscal foresight. Therein they also demonstrate the challenges for econometricians that aim to quantify the impact of fiscal policy actions and at the same time account adequately for fiscal foresight. In addition, our second key contribution is to numerically examine fiscal policy reforms, in the presence of several tax instruments.Note that there are fundamental differences between lump-sum taxation and distortionary taxation: a labour income tax under inelastic labour supply does not affect household margins and therefore causes no distortion, but under elastic labour supply the labour income tax affects the intra-temporal choice between consumption and leisure of the household and may cause an intra-temporal distortion. Next, a capital income tax has the potential to cause up to two types of distortion. First, the capital income tax in any case affects the inter-temporal household Euler equation. In case of elastic labour supply, the capital income tax also affects the intra-temporal choice between consumption and leisure of the household due to its distortion of the consumption choice. Finally, a consumption tax may also cause an inter-temporal distortion by affecting the household Next to the analytical derivations, we also calibrate our model and calculate welfare consequences for several policy experiments under perfect foresight as well as under learning. For this purpose, we make use of the welfare measure proposed by Lucas (1990) and also applied by Cooley and Hansen (1992) (for discrete time), which takes into account the whole transition path between the initial and new steady-states associated with initial ...

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“…Then, to satisfy (18), ∃v such that τ v > 0 and s v > 0. We demonstrate that a marginal decrease in τ v accompanied by a marginal increase in τ u so that (18) is satisfied increases indirect utility (17).…”

Section: Appendixmentioning

confidence: 73%

“…We demonstrate that if the world is in a steady state with strictly positive government debt, then welfare can be increased with a current tax cut financed by higher future taxes. (17) and (18) it is sufficient to show that…”

Section: Resultsmentioning

confidence: 99%

Government Deficits in Large Open Economies: The Problem of Too Little Public Debt

Buiter

Sibert

2016

Economics

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Large and growing levels of public debt in the United States, United Kingdom, Japan and the Euro Area raise new interest in the cross-country effects of a large open economy's deficits. The authors consider a dynamic optimising model with costly tax collection and exogenously given public spending and initial debt. They ask whether the externalities associated with an individual country's deficits are positive or negative. They characterise the path of taxes in the Nash equilibrium where policy makers act nationalistically and compare this outcome to the global optimal outcome. JEL E62 F42 H21

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The Welfare Cost of Capital Income Taxation in a Growing Economy

Cited by 157 publications

References 0 publications

The welfare cost of imperfect competition and distortionary taxation

The welfare cost of imperfect competition and distortionary taxation

Anticipation, learning and welfare: the case of distortionary taxation

Government Deficits in Large Open Economies: The Problem of Too Little Public Debt

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