the winners and losers of tax reform an assessment under financial integration abstract i quantify the macroeconomic and redistributive effects of the unilateral elimination of the capital income tax in a two country heterogeneous agent incomplete markets model with progressive labor income taxes home by implementing the reform induces government responses where labor income is taxed in home and mostly subsidized in foreign in addition post reform price dynamics reduce home s wealth and suppress households ability to do consumption smoothing with negative effects on the majority particularly on the poor in turn foreign accumulates wealth and price movements work particularly in favor of the poor as a result a large majority in home prefers the status quo whereas foreign supports the reform unanimously these findings are robust to alternative scenarios where i the borrowing constraints are relaxed ii both countries jointly eliminate capital income taxes iii foreign interest income is taxed and iv home capital income tax is reduced from 40 to 35

on the determinants of direct foreign investment evidence from east and southeast asia abstract a model of derived demand for foreign capital by a multiple product monopolist is estimated for seven asian countries direct foreign investment dfi inflows are estimated to be less elastic with respect to the costs of capital including taxes than to wages and to be more elastic with respect to aggregate demand in export markets than domestic demand the output deterrent effect of higher wages is estimated to outweigh any substitution toward greater capital intensity the estimates also suggest that dfi rises with greater costs within the investors home countries no similar effect occurs with respect to costs in rival host countries and concerns for political stability have overlain economic determinants

taxing capital not a bad idea after all we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic uninsurable income shocks and permanent productivity difierences of households the optimal capital income tax rate is signiflcantly positive at 36 percent the optimal progressive labor income tax is roughly a at tax of 23 percent with a deduction of 7 200 relative to average household income of 42 000 the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system jel e62 h21 h24

debt overhang credit rationing and investment abstract this paper evaluates the effect of foreign debt on investment in a heavily indebted country using numerical simulations of a simple rational expectations growth model two particular effects are distinguished first the effect due to debt overhang of past accumulated debts and second the effect of credit rationing or inability to obtain new financing the results from the simulations indicate that credit rationing may be a powerful disincentive to investment this suggests that in order to maximize the impact on productive investment debt reduction plans need to be accompanied by additional foreign lending

time inconsistent preferences and social security in this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time inconsistent preferences who face mortality risk individual income risk and borrowing constraints we find that unfunded social security lowers the capital stock output and consumption for consumers with time consistent or time inconsistent preferences however it may raise or lower welfare depending on the strength of time inconsistency

equilibrium heterogeneous agent models as measurement tools some monte carlo evidence abstract this paper discusses a series of monte carlo experiments designed to evaluate the empirical properties of heterogeneous agent macroeconomic models in the presence of sampling variability the calibration procedure leads to the welfare analysis being conducted with the wrong parameters the ability of the calibrated model to correctly predict the long run welfare changes induced by a set of policy experiments is assessed the results show that for the policy reforms with sizable welfare effects i e more than 0 2 the model always predicts the right sign of the welfare effects however the welfare effects can be evaluated with the wrong sign when they are small and when the sample size is fairly limited quantitatively the maximum errors made in evaluating a policy change are very small for some reforms in the order of 0 02 percentage points but bigger for others in the order of 0 6 percentage points finally having access to better data in terms of larger samples does lead to substantial increases in the precision of the welfare effects estimates though the rate of convergence can be slow

optimal taxation and debt with uninsurable risks to human capital accumulation we consider an economy where individuals face uninsurable risks to their human capital accumulation and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt we show that in the presence of such risks it is beneficial to tax both labor and capital and to issue public debt we also assess the quantitative importance of these findings and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion jel d52 h21 h24 h25 h63 j24 human capital is an important component of wealth both at the individual and aggregate level and its role has been investigated in various fields in economics in public finance jones manuelli and rossi 1997 show that the zero capital tax result of chamley 1986 and judd 1985 1 can be strengthened if human capital accumulation is explicitly taken into account specifically they demonstrate that in a deterministic economy with human capital accumulation in the long run not only capital but also labor income taxes should be zero hence the government must accumulate wealth that is public debt be negative to finance its expenditure

factor income taxation in a horizontal innovation model we consider the optimal factor income taxation in a standard r d model with technical change represented by an increase in the variety of intermediate goods in the model there are externalities both to working and to saving due to market power by firms incomplete appropriability of the benefits of inventions and the cost of economic activity in terms of public expenditures redistributing the tax burden from labor to capital will increase employment but in most cases reduce the rate of growth with conflicting effects on the deadweight loss from the externalities under plausible calibrations of the model the optimal tax rate on capital will be sizable

anticipated development assistance temporary relief aid and consumption behaviour of low income countries much debate about the effectiveness of foreign aid to developing countries focuses on the assumption that aid flows mainly enhance current consumption rather than being channelled into investment this paper seeks to establish what proportion of foreign assistance is used to finance current consumption the principal hypothesis to be tested is that aid transfers include very heterogeneous components with different marginal propensity to raise consumption estimating the average marginal propensity to consume of all the components of aid as is commonly done may lead to erroneous results the flow of foreign aid from high to low income countries can be classified into two types the first includes income transfers of a relief nature such as emergency and distress relief including drought related food transfers medical and refugee relief and balance of payments crisis support these transfers are generally a temporary response to unanticipated events or shocks to the economy they can be perceived as an attempt by the donor community to help finance what is denoted in the permanent income theory as transitory consumption friedman i957 in addition they can be viewed as an attempt to maintain a subsistence level of consumption by absorbing the shocks to income entirely by changes in savings the low level of savings however and the constraints on foreign borrowing lead to dependency on foreign transfers and prevent domestic savings from being the residual that is almost all of

optimal taxation in life cycle economies abstract we use a very standard life cycle growth model in which individuals have a labor leisure choice in each period of their lives to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income the intuition for our result is straightforward in a life cycle model the individual s optimal consumption work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual s lifetime one way to achieve this goal is to use capital and labor income taxes that vary with age if tax rates cannot be conditioned on age a nonzero tax on capital income is also optimal as it can imperfectly mimic age conditioned consumption and labor income tax rates journal of economic literature classification numbers e62 h21

a quantitative analysis of capital income taxation this paper studies the quantitative impact of eliminating capital income taxation on capital accumulation and steady state welfare in a general equilibrium model with overlapping generations of sixty five period lived individuals who face idiosyncratic earnings risk borrowing constraints and life span uncertainty under a wide range of parameter configurations the capital income tax rate that maximizes steady state welfare is positive even though eliminating it completely would raise the steady state capital stock toward the golden rule this is because the tax burden is shifted toward the younger and liquidity constrained years reducing the individuals ability to self insure copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the optimal taxation of asset income when government consumption is endogenous theory estimation and welfare this paper derives the ramsey optimal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it extending judd 1999 i demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model employing a vector error correction model to estimate the relationship between government consumption and net output or the factor inputs that generate it for the united states between 1948q1 to 2015q4 i demonstrate that this special case is empirically implausible and show how a cointegrating vector can be used to determine the optimal tax schedule i simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income and contrast these results with those generated in a version of the model where government consumption is purely exogenous the shifting pattern of welfare measurements con rms the theoretical results i calculate that the prevailing effective tax rate on net asset income in the us between 1970 and 2014 averaged 0 449 hence abolishing the tax completely does generate welfare improvements though only by the equivalent of between 1 103 and 1 616 percent permanent increase in consumption well under half the implied welfare benefit when the endogeneity of the government consumption is ignored the maximum welfare improvement from shifting part of the burden of tax from capital to labor is the equivalent of a permanent increase in consumption of between only 1 491 and 1 858 and is attained when the tax rate on asset income is lowered to between 0 148 and 0 186 allowing the tax rate to vary over time raises the maximum welfare bene t to 1 865 all the results are very robust to a wide range of elasticities of labor supply

on the distributional effects of reducing capital taxes this article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes we compare a representative agent economy to an economy in which households face idiosyncratic uninsurable income risk the income process is consistent with empirical estimates and implies a realistic wealth distribution we find that capital tax cuts imply large welfare gains in the representative agent economy however when households are heterogeneous substantial redistribution during transition means that only a minority will support capital tax cuts whereas most households can expect large welfare losses

should we refinance unfunded social security within a continuous time overlapping generations model featuring endogenous intensive margin of the labour supply and retirement decision we analyse the issue of passing the burden of payroll revenues onto consumption or capital we find that large long run welfare gains occur when pension benefits are refinanced by consumption taxes however the transition to the new steady state is very painful for a large fraction of existing cohorts on the other hand the capital base is too small to sustain pension benefits but could be made larger if capital taxes are raised yet that would entail significant welfare losses

on the consequences of eliminating capital tax differentials in the united states structure and equipment capital are eectively taxed at dierent rates recently president obama joined the group of policy makers and economists who propose to eliminate these dierentials this paper analyzes the consequences of such a reform using an incomplete markets model with equipment skill complementarity we nd that the reform increases average welfare by 0 1 importantly we nd that the reform does not involve the usual eciency vs equality trade o it improves both jel classication e62 h21

back to basics in malaysia and thailand the role of resource based exports in their export led growth abstract malaysia and thailand s remarkable economic growth in recent decades has been widely attributed to rapid growth of their labor intensive manufactured exports this paper demonstrates the important role that resource based products especially simply processed goods have played in their export growth while exports have thus followed their dual static comparative advantage in abundant resources and unskilled labor there has been limited movement into higher end exports a dual strategy of supporting forward linkages into higher value added resource based industries while continuing to encourage the development of backward linkages from the non resource based manufactures is suggested

welfare and optimum dynamic taxation of consumption and income abstract this paper estimates that the us could attain large welfare gains by implementing an optimal ramsey tax policy that taxes consumption and income it is also found that the welfare implications associated with taxing consumption are quantitatively more important than those associated with dynamically taxing income indeed replacing income taxes with a constant consumption tax leads to a welfare gain that is only slightly lower than that attained by a dynamic policy that taxes consumption and income in computing these welfare gains careful attention is given to the dynamic path of tax rates and the transitional dynamics associated with how the economy responds to a new tax policy

the credit channel transmission mechanism and the nonlinear growth and welfare effects of inflation and taxes with the credit channel effect driven by the central bank s open market operations this paper s model easily gives rise to the nonlinear inflation growth nexus which is evidenced by a number of cross country empirical studies the threshold level of the inflation rate is found to be lower when tax rates are higher the presence of the credit channel effect also provides the rationale for setting positive and smaller than 1 tax rates on consumption labor income and capital income the optimal tax rates rise as the inflation target declines under a fiscal policy rule where labor and capital income taxes move proportionally to each other the optimal capital income tax rate could be higher than the optimal labor income tax rate under a sufficiently large central bank balance sheet the credit channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing this provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets jel e58 e62 o42

taxing capital along the transition not a bad idea after all this paper quantitatively characterizes optimal tax systems in a model of overlapping generations when transitional cohorts are explicitly taken into account we use the recent study of conesa et al 2009 as an example but extend it by transitional dynamics we furthermore develop a general and coherent way of aggregating welfare effects of different individuals and cohorts in the short and long run our welfare measure includes the case of a utilitarian social welfare function yet is not limited to this perspective we show that the optimality of a high capital income tax rate along the transition crucially depends on the assumption of a utilitarian social welfare function this objective of the policy maker comprises implicit redistributive objectives across and within cohorts based on pure economic efficiency and insurance effects however we find a zero capital income tax rate and a less progressive labor income tax schedule to be optimal such a tax system receives political support from initial cohorts a high capital income tax regime on the other hand doesn t

rationing in an open economy fix price equilibrium and two gap models abstract two gap models have been criticized severely for the lack of realism of their assumptions but are still prominent in development planning and implicitly in discussions of short run policy problems here the model s applicability outside a command economy is considered by comparing it with a rationing model with proper micro foundations it is shown that the two gap model in general violates fix price equilibrium properties but that the fix price model generates quite similar results

a welfare analysis of social security in a dynastic framework in this article we study the welfare effects of unfunded social security in a general equilibrium model populated with overlapping generations of altruistic individuals that differ in lifetime expectancy and earnings ability contrary to previous research our results indicate that steady state welfare increases with social security for most households although by very different amounts this result is mainly due to two factors first the presence of two sided altruism significantly mitigates the crowding out effect of unfunded social security second ability shocks and uncertain lifetimes generate significant heterogeneity among households to yield different induced preferences for social security

macro economic aspects of the effectiveness of foreign aid on the two gap model home goods disequilibrium and real exchange rate misalignment we construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage price rigidities in the classical regime but decreases them in the keynesian unemployment regime a link is made with the two gap model but we highlight the role of real exchange rate misalignment failure to clear the nt goods market

temptation driven behavior and taxation a quantitative analysis in a life cycle model i introduction a central research question in the dynamic fiscal policy literature during the last 30 years or so is whether under fairly general modeling choices the government should impose a positive tax on capital income in the long run the original answer to this question is negative and is due to the seminal papers by chamley 1986 and judd 1985 who established that in the context of a standard neoclassical growth model with infinitely lived individuals an optimal income tax policy entails taxing capital at confiscatory rates in the short run and setting capital income taxes equal to zero in the long run only labor income should be taxed in the long run since then several modeling choices that cast doubt on the validity of this result were identified in the literature imrohoroglu 1998 showed that the optimal capital income tax rate is strictly positive in an overlapping generations olg setting where individuals face idiosyncratic earnings risk borrowing constraints and life span uncertainty conesa kitao and krueger 2009 extended imrohoroglu 1998 by adding a labor leisure choice they demonstrated that the optimal capital income tax rate is equal to 36 and concluded that this high rate is mainly driven by the life cycle structure of the model in contrast krusell kuruscu and smith 2010 analytically showed that within a class of ramsey tax schemes the optimal capital income tax rate should be negative that is savings should be subsidized when agents have self control problems moreover in the special case where consumers succumb completely to temptation ramsey taxes deliver first best welfare outcomes and in contrast to the chamley judd result the optimum calls for a subsidy to savings however an integrated assessment of the combined effects of the relevant trade offs both along the dimension of differences in preferences and along the dimension of the scope of capital income taxation versus labor income taxation is missing from all previous studies in both social security and capital taxation literature and this paper aims to bridge the gap in the literature and contribute in this aspect to the best of our knowledge this paper is the first study that introduces temptation driven preferences in a quantitative model aiming to tackle the question on the optimal capital income tax before proceeding to specifically articulate this paper s contribution to the literature we consider critical to address a question that lies at the very core of our line of research namely why fiscal policy models with time inconsistent or self control preferences are relevant in the first place initially the literature pioneered by strotz 1956 and phelps and poliak 1968 corroborated evidence coming from both introspection and experiments that agents exhibit preference reversals as time passes different strands within this literature have suggested that these preference reversals could be induced by either time inconsistent preferences see laibson 1997 or self control preferences gul and pesendorfer 2004 time inconsistent preferences typically assume that agents have sequences of different selves each valuing consumption streams in a unique way in contrast gul and pesendorfer 2004 provide a dynamically consistent model suitable for addressing preference reversals that does not necessitate splitting up the consumer in multiple selves that is self control preferences these preferences describe an individual that in every period is tempted to consume his entire endowment when he consumes less than his endowment he incurs a disutility cost that stems from exercising self control that is self control cost optimal behavior trades off the temptation to consume vis a vis the long run self interest of the individual 1 alongside these theoretical underpinnings there is sound empirical and experimental evidence that agents suffer from self control problems

determining the motives for a positive optimal tax on capital previous literature demonstrates that in a computational life cycle model the optimal tax on capital is positive and large given the computational complexities of these overlapping generations models it is helpful to to determine the relative importance of the economic factors driving this result i highlight the impact of changing two common assumptions in a benchmark model that generates a large optimal tax on capital similar to the model in conesa et al 2009 first the utility function is altered such that it implies an agent s frisch labor supply elasticity is constant as opposed to increasing over his lifetime second the government is allowed to tax accidental bequests at a separate rate from ordinary capital income the main nding of this paper is that these two changes cause the optimal tax on capital to drop by almost half furthermore i nd that the welfare costs of adopting the high optimal tax on capital from the benchmark model in the model with the altered assumptions which calls for a lower tax on capital are equivalent to 0 35 percent of total lifetime consumption quantifying the impact of these assumptions in the benchmark model is important because the rst has limited empirical evidence and the second although included for tractability confounds a motive for taxing capital with a motive for taxing accidental bequests jel e62 h21

the macroeconomic effects of direct foreign investment the case of thailand abstract earlier research on the macroeconomic impact of direct foreign investment dfi on the host economy focused particularly on the impact on growth and on the current account of the balance of payments findings were mixed but it was clear that the effects were not always positive and in fact quite often negative the recent upsurge in dfi flows are different from the past in that they are characterized by a strong concentration on export production it is therefore relevant to reassess the channels of macroeconomic impact and their intensity the present paper does this using thailand as an example it concludes that export oriented dfi is likely to have a positive effect on private investment and growth but can have adverse balance of payments consequences

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

uncertainty and the demand for education the impact of uncertainty in future income on the demand for education from both theoretical and empirical points of view is analyzed theoretical results deviate substantially from their counterparts in models of human capital formation with certain future income the theory is tested with a sample of high school graduates that contains data on subjective expectations empirical evidence from binomial logit analysis does not entirely support the behavioral implications of the theoretical model

the macroeconomic impact of development aid a critical survey the early literature explained aid s macroeconomic impact in the context of the dual gap model showing a clear link between aid and growth many now believe that the empirical evidence shows there to be no such relationship this paper critically reviews the different theoretical perspectives the dual gap model the savings debate recipient fiscal response and aid as dutch disease and the empirical debates on aid savings and growth the basis for denying a relationship between aid and growth is shown to be weak though more recent areas of research offer promising directions for future work

flat tax reform a quantitative exploration abstract this paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the u s is replaced by a flat tax as proposed by hall and rabushka 1995 the flat tax 2nd ed hoover the central aspects of such reform the impact of tax reform on capital accumulation and labor supply as well as its distributional consequences are analyzed in a dynamic general equilibrium model main results are that i the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation ii mean labor hours are relatively constant across tax systems but aggregate labor in efficiency units increases iii in all circumstances analyzed the distributions of earnings income and especially wealth become more concentrated

altruism incomplete markets and tax reform abstract we compute the welfare effects of different revenue neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the u s economy in our dynastic model the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35 75 of the population alive at the time of the reform benefit from it individuals use intervivos transfers and bequests to redistribute the long run benefits in a pure life cycle economy that lacks this redistribution technology we find that the same reform would benefit only 9 of the population

labor dependent capital income taxation abstract capital taxation which is negatively correlated with labor supply is proposed this paper uses a life cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle when they otherwise would work less the system also adds to the saving motive of prime age households and raises aggregate capital the increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate the negative cross dependence generates a sizable welfare gain in the long run relative to the tax system that treats labor and capital income separately as a tax base the reform however can hurt the elderly during the transition with a high marginal tax on their capital income

on income and wealth taxation in a life cycle model with extensive labour supply in a stationary life cycle model with extensive labour supply two forms of taxation are studied non linear income taxation and linear wealth taxation in the life cycle model the social weights of the dynasties depend on their permanent incomes not on the observed taxable current income a tax on wealth then can complement income tax as a redistributive tool the derivative of social welfare with respect to the wealth tax rate at the no tax point is computed it is positive whenever permanent income is positively correlated with aggregate life time savings this result is illustrated on a numerical example

the foreign exchange constraint suppression of the trade deficit and the shadow price of foreign exchange in a fix price economy abstract the foreign exchange gap is analysed as a possible feature of a fix price economy the implications of closing the gap by means of import rationing are then discussed finally a set of shadow rates of exchange is derived these shadow prices are conditional on the prevailing regimes and include the paradoxical possibility of a negative shadow rate of exchange

direct and indirect effects of parental education level on the demand for higher education this paper investigates empirically the impact of parental education level family income scholastic ability and expectations on earnings and employment on the demand for higher education in the netherlands in theory the factors mentioned are important determinants of educational choice the wald or distance test is used to discriminate between direct and indirect effects of the parental education level and other background variables on the demand for higher education we find that family income ability and expectations have a direct effect on earnings and employment while the parental education level exerts indirect effects only

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

the demand for education under capital market imperfections this paper studies the theoretical implications of the demand for education assuming the same regime for financing consumption and the direct costs of education when the capital market is not perfect it is motivated by the policy concerns on the financing of post secondary education in case of an imperfect capital market the separation theorem see e g wallace and ihnen 1975 is not valid and the theoretical implications substantially deviate from their counterparts under a perfect capital market regime for example in a capital market with credit rationing the borrowing rate exerts a positive effect on the demand for education whereas this effect is negative in case of a perfect capital market the theoretical results are used to discuss the effects of government policy on the demand for post compulsory education

consumption taxes and precautionary savings financing government spending through lump sum taxes does not distort capital when markets are complete but tends to increase precautionary savings under market incompleteness using flat consumption taxes instead leaves precautionary savings unaffected provided certain conditions on utility are met

unemployment expectations and human capital formation abstract this paper analyses the demand for education in the framework of the human capital theory extended with employment prospects that depend on the amount of education unemployment considerations are especially important for the european countries in the 1980s by using comparative statics we derive the theoretical properties of the model in a number of important respects these results differ from their counterparts in the traditional human capital literature by fitting a binomial logit model to a sample of educational choices of dutch high school graduates we find substantial empirical support for the theory high unemployment by itself does not drive youth towards additional education but youth strives for more education in order to improve their employment prospects

optimal taxation of capital income with imperfectly competitive product markets abstract we show that the steady state optimal tax on capital income can be negative positive or zero in a neoclassical growth model that allows for imperfectly competitive product markets the sign of the optimal tax rate depends crucially on 1 the degree of monopoly power 2 the extent to which monopoly profits can be taxed 3 the size of the depreciation allowance and 4 the magnitude of government expenditures for an empirically plausible set of parameters we find that the steady state optimal capital tax can range between 10 and 22

do public investment and fdi crowd in or crowd out private domestic investment in malaysia motivated by the concern of a persistent decline in total investment in malaysia during the post crisis era this article examines the long run relationship between private domestic investment pdi public investment and foreign direct investment fdi in malaysia using multivariate cointegration techniques the results indicate a fairly robust cointegrated relationship between these variables during the period 1960 to 2003 both public investment and fdi are found to be complementary to rather than competing with pdi

dividend and capital gains taxation under incomplete markets motivated by the jobs and growth tax relief reconciliation act jgtrra of 2003 the effects of capital income tax cuts are investigated in an economy with heterogeneous households and a representative mature firm dividend tax cuts contrary to capital gains tax cuts lead to a decrease in investment and capital this is because they increase the market value of existing capital and households require a higher return to hold this additional wealth in line with empirical evidence the model predicts substantial increases in dividends and stock prices overall the tax cuts lead to a welfare reduction equivalent to a consumption drop of 0 5

the timing of redistribution we investigate whether late redistribution programs that can be targeted toward low income families but that may distort savings decisions can dominate early redistribution programs that cannot be targeted as a result of information constraints we use simple two period overlapping generations models with heterogeneous agents under six policy regimes a model calibrated to the u s economy benchmark two early redistribution lump sum regimes two targeted late redistribution regimes and finally a model without taxes and redistribution redistribution programs are financed by a labor tax on the young generation and a capital tax on the old generation we argue that if the programs are small in size late redistribution can dominate early redistribution in terms of welfare but not in terms of real output better targeting of low income households cannot completely offset savings distortions in addition we find that the optimal transfer and tax policy implies a capital tax of 100 and transfers exclusively to the young generation

optimal redistributive capital taxation in a neoclassical growth model abstract this paper provides a counterexample to the simplest version of the redistribution models considered by judd 1985 in which the government chooses an optimal distortionary tax on capitalists to finance a lump sum payment to workers i show that the steady state optimal tax on capital income is generally non zero when the capitalists utility is logarithmic and the government faces a balanced budget constraint with log utility agents optimal decisions depend solely on the current rate of return not any future rates of return or tax rates this feature of the economy effectively deprives the government of a useful policy instrument because promises about future tax rates can no longer influence current allocations when combined with a lack of other suitable policy instruments such as government bonds the result is an inability to decentralize the allocations that are consistent with a zero limiting capital tax i show that the standard approach to solving the dynamic optimal tax problem yields the wrong answer in this knife edge case because it fails to properly enforce the constraints associated with the competitive equilibrium specifically the standard approach lets in an additional policy instrument through the back door

wealth distribution and optimal inheritance taxation in life cycle economies with intergenerational transfers we introduce intergenerational transfers into a general equilihrium life cycle model in order to explain observed levels of wealth heterogeneity in our overlapping generations model heterogenous agents face uncertain lifetime and leave both accidental and voluntary bequests to their cinldren furthermore agents face stochastic employment opportunities the model is calibrated with regard to the characteristics of the us economy our resuits indicate that hequests onl account for a sniall proportion of ohserved wealth heterogeneitv the introduction of an inheritance tax increases both welfare are measured by the average value of the newborn and equality of the wealth distribution preliminary versions of this paper have been presented at conference on intergenerational transfers taxes and the distribution of wealth in uppsala 1999 and the econoinetric societv european meetirig in santiago dc compostela 1999 we would like to thank michael kaganovieli john laitner james smith frank stafford and carl cristian von weizsacker for comments on earlier versions of the paper all remaining errors are ours