Optimal Capital Taxation and Consumer Uncertainty

Justin Svec and Ryan Chahrour

No 1108, Working Papers from College of the Holy Cross, Department of Economics

Abstract: This paper analyzes the impact of consumer uncertainty on optimal scal policy in a model with capital. The consumers lack con dence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-con dence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent. JEL Codes: E62, H21

Keywords: Model uncertainty; capital income tax; public debt; Robust control; uncertainty; taxes; capital; Ramsey problem (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2011-08
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Macroeconomics, Volume 41, 2014, pp. 178-198.

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Related works:
Journal Article: Optimal capital taxation and consumer uncertainty (2014)
Working Paper: Optimal Capital Taxation and Consumer Uncertainty (2014)
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