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Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution

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  • Santanu Chatterjee
  • Paola Giuliano
  • Stephen J. Turnovsky

Abstract

This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, ɛ, and the coefficient of risk aversion, R, can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both ɛ and R. Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition (R= 1/ɛ) can be significant, suggesting that this functional form should be employed with caution.

Suggested Citation

  • Santanu Chatterjee & Paola Giuliano & Stephen J. Turnovsky, 2004. "Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(2), pages 277-310, May.
    • Handle: RePEc:bla:jpbect:v:6:y:2004:i:2:p:277-310
    DOI: 10.1111/j.1467-9779.2004.00167.x
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    3. Theodore Palivos & Dimitrios Varvarigos, 2013. "Intergenerational Complementarities in Education, Endogenous Public Policy, and the Relation Between Growth and Volatility," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(2), pages 249-272, April.
    4. Turnovsky, Stephen J. & Smith, William T., 2006. "Equilibrium consumption and precautionary savings in a stochastically growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 243-278, February.
    5. Mark C. Kelly, 2022. "Growth and Welfare Implications of Mortality Differentials in Unfunded Social Security Systems," Public Finance Review, , vol. 50(2), pages 206-235, March.
    6. Liao, Zhong-Wei & Shao, Jinghai, 2024. "Stability and mean growth rate of stochastic Solow model driven by jump–diffusion process," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    7. Theodore Palivos & Dimitrios Varvarigos, 2009. "Intergenerational Complementarities in Education and the Relationship between Growth and Volatility," Discussion Papers in Economics 09/8, Division of Economics, School of Business, University of Leicester.
    8. Kenc, Turalay & Cevik, Emrah Ismail, 2024. "Global corporate tax policy space," Economic Systems, Elsevier, vol. 48(2).
    9. Pommeret, Aude & Smith, William T., 2005. "Fertility, volatility, and growth," Economics Letters, Elsevier, vol. 87(3), pages 347-353, June.
    10. Kelly, Mark, 2017. "Health capital accumulation, health insurance, and aggregate outcomes: A neoclassical approach," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 1-22.

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