Machines, buildings, and optimal dynamic taxes

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Slavik, Ctirad and Yazıcı, Hakkı (2014) Machines, buildings, and optimal dynamic taxes. Journal of Monetary Economics, 66 . pp. 47-61. ISSN 0304-3932 (Print) 1873-1295 (Online)

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Official URL: http://dx.doi.org/10.1016/j.jmoneco.2014.04.004


The effective taxes on capital returns differ depending on capital type in the U.S. tax code. This paper uncovers a novel reason for the optimality of differential capital taxation. We set up a model with two types of capital - equipments and structures - and equipment-skill complementarity. Under a plausible assumption, we show that it is optimal to tax equipments at a higher rate than structures. In a calibrated model, the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state. The welfare gains of optimal differential capital taxation can be as high as 0.4 % of lifetime consumption.

Item Type:Article
Uncontrolled Keywords:Differential capital asset taxation; Equipment capital; Structure capital; Equipment-skill complementarity
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
ID Code:24791
Deposited By:Hakkı Yazıcı
Deposited On:16 Dec 2014 11:55
Last Modified:02 Aug 2019 11:16

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