Intertemporally Dependent Preferences and the Welfare Cost of Capital Income Taxation

Muhammad Islam

International Tax and Public Finance, 1998, vol. 5, issue 4, 489-498

Abstract: The welfare cost of capital income taxation is analyzed utilizing intertemporally dependent preference operationalized using a variable rate of time preference. It is shown that if households exhibit increasing marginal impatience, then the welfare cost of capital income taxation is inversely related to the elasticity of the rate of time preference with respect to consumption. Therefore, the welfare cost of capital income taxation reported using time additive preferences may not be robust. Numerical examples show that the use of time additive preferences could result in the welfare cost of capital income taxation to be overestimated by as much as 25%. Copyright Kluwer Academic Publishers 1998

Keywords: welfare cost; capital income taxation (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1023/A:1008646722661

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