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Intangible Capital and Ramsey Capital Taxation (updated)

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  • Juan Carlos Conesa
  • Begoña Domínguez

Abstract

The standard analysis of optimal fiscal policy in the neoclassical growth model, e.g. Chamley (1986) and Judd (1985), aggregates different types of assets into a unique capital good and all sorts of capital taxes into a unique capital tax. There, the optimal capital tax rate is very high in the short-run and zero in the long-run and, inevitably, time-inconsistent. This paper shows that this classic result does not hold in a more disaggregated framework. As proposed in McGrattan and Prescott (2005), we consider an economy with corporate and dividend taxes, where firms invest in both tangible and intangible assets. If corporate taxes are high, firms can avoid current taxation by investing in intangible assets that can be expensed. If dividend taxes are temporarily high, firms can defer dividend payments. We show that the Ramsey plan is characterized by zero corporate taxes every period (including the initial one) and constant dividend tax rates, so the Ramsey capital taxation is time-consistent.

Suggested Citation

  • Juan Carlos Conesa & Begoña Domínguez, 2009. "Intangible Capital and Ramsey Capital Taxation (updated)," Working Papers 282, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:282
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    References listed on IDEAS

    as
    1. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    2. Zhu, Xiaodong, 1995. "Endogenous capital utilization, investor's effort, and optimal fiscal policy," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 655-677, December.
    3. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, vol. 69(6), pages 1491-1518, November.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Cárceles‐Poveda, 2022. "Financing corporate tax cuts with shareholder taxes," Quantitative Economics, Econometric Society, vol. 13(1), pages 315-354, January.
    2. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Carceles-Poveda, 2014. "On the Double Taxation of Corporate Profits," Department of Economics Working Papers 14-03, Stony Brook University, Department of Economics.

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