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Kevin x.d. Huang, Qinglai Meng and Jianpo Xue
 
''Capital Income Taxation and Aggregate Instability''
 
 
This paper overturns the conventional wisdom that reliance on capital tax rate adjustment to ensure fiscal sustainability is immune to extrinsic uncertainty. The interaction of capital taxation and endogenous capital utilization generates fiscal increasing returns and factor share redistribution to induce sunspots expectations. Capital depreciation allowance debilitates this mechanism to preempt policy induced instability while achieving budget objective. Self-fulfilling fluctuations can occur in real-world economies, unless their depreciation allowances are sufficiently higher or income tax rates lower than the current levels. This adds a short-run motivation to the long-run approach to capital taxation and the supply-side view of fiscal policy reforms.
 
 
Keywords: Capital income taxation, Depreciation allowance, Endogenous utilization, Fiscal increasing returns, Self-fulfilling prophecies
JEL: E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
 
Manuscript Received : Mar 25 2019 Manuscript Accepted : Mar 27 2019

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