Optimal tax policy under habit formation and capital utilization

Goncalo Monteiro, Adam Cook and Sanjoy Dey

Journal of Macroeconomics, 2013, vol. 37, issue C, 230-248

Abstract: Our objective is to investigate, how the combination of habit formation with endogenous capital utilization decisions affects the process of economic growth. We find that in the presence of positive productivity growth, habit formation in consumption reduces the rate of capital utilization while increasing the long run stock of capital. We show in the Chamley–Judd result of zero income capital taxation is robust to the presence of endogenous capital utilization. The result even extends to the short-run as long as there are no depreciation allowances, but breaks if those are present. Our policy simulations show that steady state level of capital utilization is not affected by changes in income tax, but its reduced on impact to accommodate for the constance of capital stock Our numerical simulations also show important differences in the time adjustment followed by key variables, as a response to tax policy.

Keywords: Habit formation; Capital utilization; Optimal taxation; Economic growth; User cost (search for similar items in EconPapers)
JEL-codes: D91 E21 O41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:37:y:2013:i:c:p:230-248

DOI: 10.1016/j.jmacro.2013.03.001

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