Capital taxation with heterogeneous discounting and collateralized borrowing

Nina Biljanovska and Alexandros P. Vardoulakis

Journal of Macroeconomics, 2019, vol. 60, issue C, 97-109

Abstract: We study optimal long-run capital taxation in a closed economy with heterogeneity in agents’ time-discount factors and collateralized borrowing. The collateral constraint distorts intertemporal optimization margins and therefore the tax system serves to alleviate the distortion on top of financing government expenditure. The discrepancy between the private and the social discount factors pushes for a capital subsidy, while the collateral constraint pushes for a capital tax. Consumption smoothing motives result in a strictly positive capital tax in the long run, while when they are muted, the two effects counter-balance and the tax is zero.

Keywords: Ramsey taxation; Tax on capital; Collateral constraint; Heterogeneous discount factors (search for similar items in EconPapers)
JEL-codes: E60 E61 E62 H21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:60:y:2019:i:c:p:97-109

DOI: 10.1016/j.jmacro.2019.01.009

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