Optimal Capital Taxation and Consumer Uncertainty

Chahrour, Ryan and Svec, Justine (2014) Optimal Capital Taxation and Consumer Uncertainty. Journal of Macroeconomics, vol.41. pp. 178-198.

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Official URL: http://tse-fr.eu/pub/28285

Abstract

This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent.

Item Type: Article
Language: English
Date: September 2014
Refereed: Yes
Uncontrolled Keywords: Model uncertainty, capital income tax, public deb
JEL codes: E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
H21 - Efficiency; Optimal Taxation
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:48
Last Modified: 24 Jan 2019 00:09
OAI ID: oai:tse-fr.eu:28285
URI: http://publications.ut-capitole.fr/id/eprint/16525

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