Optimal capital taxation for time-nonseparable preferences

Sebastian Koehne and Moritz Kuhn

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the effect of habit formation on optimal capital taxes in a dynamic Mirrleesian model. We make three distinct contributions. First, we decompose intertemporal wedges (implicit capital taxes) for general time-nonseparable preferences into a wealth effect, a complementarity effect, and a future incentive effect. Second, we provide conditions under which intertemporal wedges are positive. Third, we derive a recursive formulation of constrained efficient allocations and evaluate the quantitative impact of habit formation. In a model parameterized to the U.S. economy, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case. Moreover, intertemporal wedges are close to zero for the largest part of the working life.

Keywords: optimal taxation; intertemporal wedge; habit formation; recursive contracts; new dynamic public finance (search for similar items in EconPapers)
JEL-codes: D82 E21 H21 (search for similar items in EconPapers)
Date: 2013-03-18
New Economics Papers: this item is included in nep-dge and nep-pub
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Related works:
Working Paper: Optimal capital taxation for time-nonseparable preferences (2013)
Working Paper: Optimal capital taxation for time-nonseparable preferences (2013)
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