Transition Losses of Partially Mobile Industry-Specific Capital

Abstract

Comparative static models typically assume homogeneous and mobile factors in estimating the economic effects of a tax policy change. Even dynamic models employ a given homogeneous capital stock in two different al locations for the first period of two equilibrium sequences. This malleable capital assumption causes overstatement of early efficiency gains from policies designed to improve factor allocation. on the other hand, immobile factor models would understate such gains by assuming that no capital ever relocates. The model in this paper attempts to bridge this gap by restricting each industry's capital reduction to its rate of depreciation. The stock of depreciated capital from the previous period represents an industry-specific type of capital which may earn a lower equilibrium return. The usage of mobile capital above this minimum constraint is limited by the total gross saving of the economy, including all industries' depreciation and consumer net saving. The industry-specific capital model suggests, for example, that previous estimates of the dynamic efficiency gain from full integration of personal and corporate taxes in the U.S. are overstated by about $5 billion. The model could also be used to estimate distributional impacts on individuals with more than proportionate ownership of capital in particular industries.