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Capital Taxation with Heterogeneous Discounting and Collateralized Borrowing

Nina Biljanovska and Alexandros Vardoulakis
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Nina Biljanovska: Internationaler Währungsfonds

No 2017-053, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study optimal long-run capital taxation in a closed economy with heterogeneity in agents' time-discount factors where borrowing is allowed but restricted by a collateral constraint. Financial frictions distort intertemporal optimization margins and the tax system serves a dual role: first, it is used to finance government consumption; second, it serves to alleviate the distortions arising from the binding collateral constraint. The discrepancy between the private and the social discount factors pushes for a subsidy on capital, while the discrepancy introduced by the collateral constraint pushes for a tax in the long-run. When consumption smoothing motives are muted, the two effects counter-balance each other and the tax is zero. With finite elasticity of intertemporal substitution, the second discrepancy dominates and the tax on capital income is positive in the long-run.

Keywords: Ramsey taxation; Collateral constraint; Heterogeneous discount factors; Tax on capital (search for similar items in EconPapers)
JEL-codes: E60 E61 E62 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2017-05-05
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-53

DOI: 10.17016/FEDS.2017.053

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