Machines, buildings, and optimal dynamic taxes

Ctirad Slavik and Hakki Yazici ()

Journal of Monetary Economics, 2014, vol. 66, issue C, 47-61

Abstract: The effective taxes on capital returns differ depending on capital type in the U.S. tax code. This paper uncovers a novel reason for the optimality of differential capital taxation. We set up a model with two types of capital – equipments and structures – and equipment-skill complementarity. Under a plausible assumption, we show that it is optimal to tax equipments at a higher rate than structures. In a calibrated model, the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state. The welfare gains of optimal differential capital taxation can be as high as 0.4% of lifetime consumption.

Keywords: Differential capital asset taxation; Equipment capital; Structure capital; Equipment-skill complementarity (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (20)

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Working Paper: Machines, Buildings, and Optimal Dynamic Taxes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:66:y:2014:i:c:p:47-61

DOI: 10.1016/j.jmoneco.2014.04.004

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