Asset Value Contsraints in Models of Incomplete Factor Taxation

CIRPEE Working Paper 09-49

15 Pages Posted: 13 Nov 2009

See all articles by David M. Arseneau

David M. Arseneau

Board of Governors of the Federal Reserve System

Sanjay K. Chugh

University of Maryland

André Kurmann

Drexel University - LeBow College of Business

Date Written: November 12, 2009

Abstract

This paper clarifies the role of initial asset value constraints in Ramsey models of incomplete factor taxation. We show that the optimal long-run capital tax is zero in the long run if and only if there is no binding constraint on the initial capital tax rate. This finding contrasts with Armenter (2008) who argues that zero long-run capital taxes reappear in models of incomplete factor taxation as long as the government is barred from manipulating initial asset wealth. The reason for this difference is that the two constraints cannot both be binding at the same time. Hence, in Armenter’s (2008) analysis, the initial asset value constraint is necessarily more restrictive than the constraint on the initial capital tax rate.

Keywords: Ramsey equilibrium, incomplete factor taxation

JEL Classification: E62

Suggested Citation

Arseneau, David M. and Chugh, Sanjay K. and Kurmann, André, Asset Value Contsraints in Models of Incomplete Factor Taxation (November 12, 2009). CIRPEE Working Paper 09-49, Available at SSRN: https://ssrn.com/abstract=1504882 or http://dx.doi.org/10.2139/ssrn.1504882

David M. Arseneau

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sanjay K. Chugh

University of Maryland ( email )

College Park
College Park, MD 20742
United States

André Kurmann (Contact Author)

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

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