Capital Taxation: Quantitative Explorations of the Inverse Euler Equation
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Werning_Capital taxation.pdf
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Author(s)
Farhi, Emmanuel
Werning, Ivan
Date Issued
June 2012
Journal
Journal of Political Economy
Publisher
University of Chicago Press, The
Citation
Farhi, Emmanuel, and Ivan Werning. “Capital Taxation: Quantitative Explorations of the Inverse Euler Equation.” Journal of Political Economy 120, no. 3 (June 2012): 398-445. © 2012 The University of Chicago Press
Version
Final published version
Abstract
Economies with private information provide a rationale for capital taxation. In this paper we ask what the welfare gains from following this prescription are. We develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets. We find that general equilibrium forces are important and greatly reduce the welfare gains. Once these effects are taken into account, the gains are relatively small in our benchmark calibration. These results do not imply that dynamic aspects of social insurance design are unimportant, but they do suggest that capital taxation may play a modest role.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1086/666747
