Why Tax Capital?

YiLi Chien and Junsang Lee

No 492, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: We study optimal capital taxation in a limited commitment environment. Our environment consists of a continuum of households with idiosyncratic labor shocks, who have access to a complete contingent claims market. Financial contracts are not perfectly enforceable; as in Kehoe and Levine (1993), enforcement constraints take the form of endogenous debt limits. This market imperfection drives the endogenous discrepancy between the household and planner discount factors: households face the possibility of being debt constrained in the future, and as a result have a higher discount factor than the planner, who does not face such a constraint. In such an economy, the planner will choose an optimal capital level that is lower than that chosen by households; this di¤erence in the choice of capital motivates imposing a positive capital income tax on households to induce them to invest at the socially optimal amount

Keywords: Capital Tax; borrowing constraint; enforcement (search for similar items in EconPapers)
JEL-codes: E22 E62 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Why tax capital? (2009)
Working Paper: Why Tax Capital? (2008)
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