Measuring the Efficiency Cost of Taxing Risky Capital Income

Roger Gordon and John Wilson

American Economic Review, 1989, vol. 79, issue 3, 427-39

Abstract: This paper derives a measure of the efficiency cost of taxing risky capital income in an infinite horizon stochastic model. The resulting expression differs from all those proposed in the existing literature. The correct measure of efficiency cost will normally be smaller than any of those used in policy studies, possibly dramatically so. Uncertainty changes the expression for efficiency cost through effects arising not only from stochastic capital gains on existing capital, but also from stochastic costs of replacing existing capital. The latter effect reduces efficiency costs and normally outweighs the first effect. Copyright 1989 by American Economic Association.

Date: 1989
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Working Paper: Measuring the Efficiency Cost of Taxing Risky Capital Income (1986)
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