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Capital Income Taxes and Growth in a Stochastic Economy: A Numerical Analysis of the Role of Risk Aversion and Intertemporal Substitution
Author(s) -
Chatterjee Santanu,
Giuliano Paola,
Turnovsky Stephen J.
Publication year - 2004
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2004.00167.x
Subject(s) - economics , volatility (finance) , elasticity of substitution , tax rate , risk aversion (psychology) , welfare , capital income , elasticity of intertemporal substitution , econometrics , microeconomics , substitution (logic) , growth model , monetary economics , expected utility hypothesis , international taxation , mathematical economics , tax reform , public economics , production (economics) , market economy , programming language , computer science
This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, ɛ, and the coefficient of risk aversion, R , can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both ɛ and R . Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition ( R = 1/ɛ) can be significant, suggesting that this functional form should be employed with caution.