Optimal Capital Taxation and Consumer Uncertainty

Justin Svec ()

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

Abstract: This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence 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. It is shown analytically that the government, in responding to consumer uncertainty, no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. However, our numerical results indicate that the government does not diverge far from this value. Even though the capital income tax rate is close to zero in expectation, consumer uncertainty leads the altruistic government to implement a more volatile capital tax rate across states. In doing so, the government relies more heavily on the capital tax and, consequently, less heavily on the labor income tax to finance the shock to public spending.

Keywords: Robust control; uncertainty; taxes; capital; Ramsey problem (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2011-08
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://college.holycross.edu/RePEc/hcx/Svec_OptimalCapitalTaxation.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:hcx:wpaper:1108

Access Statistics for this paper

More papers in Working Papers from College of the Holy Cross, Department of Economics
Contact information at EDIRC.
Series data maintained by Victor Matheson ().