Tax Effects on the Allocation of Capital Among Sectors and Among Individuals: A Portfolio Approach

38 Pages Posted: 5 Jul 2004 Last revised: 9 Aug 2010

See all articles by Joel B. Slemrod

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: August 1982

Abstract

This paper deals with the allocational effects and implications for efficiency of a tax system in which the rate of tax on capital income differs depending on the recipient of the income and on the type of capital producing the income. It suggests that, in their attempts to measure the distortionary effect of the U.S. capital income tax system, economists may have been looking in the wrong places. In the presence of uncertainty, the intersectoral distortion may be much less than had previously been imagined. However, the tax system distorts at two other margins which have not received much attention. It distorts the inter-household allocation of the housing stock, since the after-tax rate of interest is one component of the opportunity cost of owner-occupied housing. It also distorts the inter-household allocation of risk-bearing. Calculations using a simple commutable general equilibrium model suggest that the excess burden from these latter two distortions are significant components of the total distortionary impact of the tax system.

Suggested Citation

Slemrod, Joel B., Tax Effects on the Allocation of Capital Among Sectors and Among Individuals: A Portfolio Approach (August 1982). NBER Working Paper No. w0951. Available at SSRN: https://ssrn.com/abstract=300728

Joel B. Slemrod (Contact Author)

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