Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution

Posted: 11 Dec 2004

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, epsilon, and the coefficient of risk aversion, R, can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both epsilon and R. Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition (R = 1/epsilon) can be significant, suggesting that this functional form should be employed with caution.

Keywords: Recursive Preferences, Stochastic Growth, Time Preference, Risk Aversion, Volatility, Tax Policy

JEL Classification: D900, E620, F430, H240, H250, O410

Suggested Citation

Chatterjee, Santanu and Giuliano, Paola and Turnovsky, Stephen J., Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution. Journal of Public Economic Theory, Vol. 6, No. 2, pp. 277-310, May 2004. Available at SSRN: https://ssrn.com/abstract=630614

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Stephen J. Turnovsky

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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