The Effect of Time-Consistent Capital Taxation on Capital Accumulation and Welfare

31 Pages Posted: 16 Jun 2012 Last revised: 30 Sep 2012

See all articles by Begoña Dominguez

Begoña Dominguez

University of Queensland - School of Economics

Zhigang Feng

University of Nebraska at Omaha - Department of Economics

Date Written: September 28, 2012

Abstract

This paper analyzes the effects of time-consistent capital taxation on the level of capital and welfare. We find that a commitment to a zero capital tax shifts the time inconsistency problem towards labor taxes and the provision of public consumption. By comparing the worst time-consistent policies with and without a commitment to zero capital taxes, we find that the mere existence of a capital tax might lead to capital tax rates that are as high as 90% at steady state and capital stocks that are 84% lower. There the welfare gains of a commitment to zero capital taxes are about 7.4% of initial steady state consumption. At the other end, comparing the best time-consistent policies, we find that the welfare losses of a commitment to zero capital taxes are about 0.9% of consumption.

Keywords: Optimal Policy, Rules vs. Discretion, Time-Consistency

JEL Classification: E61, E62, H21, H62, H63

Suggested Citation

Dominguez, Begoña and Feng, Zhigang, The Effect of Time-Consistent Capital Taxation on Capital Accumulation and Welfare (September 28, 2012). Available at SSRN: https://ssrn.com/abstract=2084721 or http://dx.doi.org/10.2139/ssrn.2084721

Begoña Dominguez

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Zhigang Feng (Contact Author)

University of Nebraska at Omaha - Department of Economics ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States

HOME PAGE: http://https://sites.google.com/site/zfeng202/

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