Transition Losses of Partially Mobile Industry-Specific Capital

40 Pages Posted: 15 Feb 2002

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 1980

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.

Suggested Citation

Fullerton, Don, Transition Losses of Partially Mobile Industry-Specific Capital (July 1980). NBER Working Paper No. w0520. Available at SSRN: https://ssrn.com/abstract=263401

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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