Abstract
This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.
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We thank Vincenzo Quadrini for comments. We would like to thank the Editor and an anonymous referee for very helpful comments. The views expressed in this paper are those of the authors. No responsibility should be attributed to the Bank of Canada.
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Meh, C.A., Terajima, Y. Uninsurable investment risks and capital income taxation. Ann Finance 5, 521–541 (2009). https://doi.org/10.1007/s10436-008-0112-8
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DOI: https://doi.org/10.1007/s10436-008-0112-8