Capital Income Taxation and the Sustainability of Permanent Primary Deficits

H.F.H.V.S. Uhlig

Research output: Working paperDiscussion paperOther research output

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Abstract

If a government imposes a tax on capital income, it may, as a result, lower the private rate of return on capital below the growth rate of an economy, thereby giving rise to the possibility of running a permanent deficit. Since, however, the before-tax rate of return and not the after-tax rate of return is relevant for judging the dynamical efficiency of the economy, the possibility of a permanent deficit does not by itself imply a possibility for a Pareto-improving redistribution of income. To examine this issue "step by step", we examine in general whether a government can run a deficit forever by rolling over its debt. Assuming the government to run a deficit in each period equal to a constant fraction of total output, we study several overlapping generations models, proceeding from endowment economies to neoclassical growth with a variable capital stock. We then introduce capital income taxation and show, for example, that permanent defcits are feasible in the case of a variable capital stock, provided the capital income tax is sufficiently high. We examine the welfare effects and discuss policy consequences.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages38
Volume1997-11
Publication statusPublished - 1997

Publication series

NameCentER Discussion Paper
Volume1997-11

Fingerprint

Capital income taxation
Sustainability
Rate of return
Government
Tax rate
Income
Capital stock
Pareto
Tax
Welfare effects
Debt
Endowments
Overlapping generations model
Capital income tax
Redistribution
Neoclassical growth

Keywords

  • income tax
  • deficit spending

Cite this

Uhlig, H. F. H. V. S. (1997). Capital Income Taxation and the Sustainability of Permanent Primary Deficits. (CentER Discussion Paper; Vol. 1997-11). Tilburg: Macroeconomics.
Uhlig, H.F.H.V.S. / Capital Income Taxation and the Sustainability of Permanent Primary Deficits. Tilburg : Macroeconomics, 1997. (CentER Discussion Paper).
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Uhlig, HFHVS 1997 'Capital Income Taxation and the Sustainability of Permanent Primary Deficits' CentER Discussion Paper, vol. 1997-11, Macroeconomics, Tilburg.

Capital Income Taxation and the Sustainability of Permanent Primary Deficits. / Uhlig, H.F.H.V.S.

Tilburg : Macroeconomics, 1997. (CentER Discussion Paper; Vol. 1997-11).

Research output: Working paperDiscussion paperOther research output

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AB - If a government imposes a tax on capital income, it may, as a result, lower the private rate of return on capital below the growth rate of an economy, thereby giving rise to the possibility of running a permanent deficit. Since, however, the before-tax rate of return and not the after-tax rate of return is relevant for judging the dynamical efficiency of the economy, the possibility of a permanent deficit does not by itself imply a possibility for a Pareto-improving redistribution of income. To examine this issue "step by step", we examine in general whether a government can run a deficit forever by rolling over its debt. Assuming the government to run a deficit in each period equal to a constant fraction of total output, we study several overlapping generations models, proceeding from endowment economies to neoclassical growth with a variable capital stock. We then introduce capital income taxation and show, for example, that permanent defcits are feasible in the case of a variable capital stock, provided the capital income tax is sufficiently high. We examine the welfare effects and discuss policy consequences.

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Uhlig HFHVS. Capital Income Taxation and the Sustainability of Permanent Primary Deficits. Tilburg: Macroeconomics. 1997. (CentER Discussion Paper).