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Taxing capital along the transition—Not a bad idea after all?

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  • Fehr, Hans
  • Kindermann, Fabian

Abstract

This paper quantitatively characterizes optimal tax systems in a model of overlapping generations, when transitional cohorts are explicitly taken into account. We use the recent study of Conesa et al. (2009) as an example, but extend it by transitional dynamics. We furthermore develop a general and coherent way of aggregating welfare effects of different individuals and cohorts in the short- and the long-run. Our welfare measure includes the case of a utilitarian social welfare function, yet is not limited to this perspective.

Suggested Citation

  • Fehr, Hans & Kindermann, Fabian, 2015. "Taxing capital along the transition—Not a bad idea after all?," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 64-77.
    • Handle: RePEc:eee:dyncon:v:51:y:2015:i:c:p:64-77
    DOI: 10.1016/j.jedc.2014.09.024
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    References listed on IDEAS

    as
    1. Hans Fehr & Fabian Kindermann, 2012. "Optimal Taxation with Current and Future Cohorts," CESifo Working Paper Series 3973, CESifo.
    2. Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.
    3. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    4. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2017. "Optimal Tax Progressivity: An Analytical Framework," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1693-1754.
    5. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2013. "Should pensions be progressive?," European Economic Review, Elsevier, vol. 63(C), pages 94-116.
    6. Peterman, William B., 2013. "Determining the motives for a positive optimal tax on capital," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 265-295.
    7. Kenichi Fukushima, 2011. "Quantifying the Welfare Gains from Flexible Dynamic Income Tax Systems," Global COE Hi-Stat Discussion Paper Series gd10-176, Institute of Economic Research, Hitotsubashi University.
    8. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.
    9. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
    10. Gervais, Martin, 2012. "On the optimality of age-dependent taxes and the progressive U.S. tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 682-691.
    11. Huang, He & İmrohorogˇlu, Selahattin & Sargent, Thomas J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(1), pages 7-44, January.
    12. Dirk Krueger & Alexander Ludwig, 2013. "Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers Are Endogenous," American Economic Review, American Economic Association, vol. 103(3), pages 496-501, May.
    13. Sagiri Kitao, 2010. "Labor-dependent capital income taxation that encourages work and saving," Staff Reports 435, Federal Reserve Bank of New York.
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    More about this item

    Keywords

    Stochastic OLG model; Precautionary savings; Intragenerational risk sharing and redistribution;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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