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Intertemporally Dependent Preferences and the Welfare Cost of Capital Income Taxation

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  • Muhammad Islam

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

Suggested Citation

  • Muhammad Islam, 1998. "Intertemporally Dependent Preferences and the Welfare Cost of Capital Income Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(4), pages 489-498, October.
    • Handle: RePEc:kap:itaxpf:v:5:y:1998:i:4:p:489-498
    DOI: 10.1023/A:1008646722661
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    Keywords

    welfare cost; capital income taxation;

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