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This research paper hit my desk this morning:

Positive Long Run Capital Taxation: Chamley-Judd Revisited
by Ludwig Straub, Ivan Werning  –  #20441 (EFG PE)


According to the Chamley-Judd result, capital should not be taxed in
the long run.  In this paper, we overturn this conclusion, showing
that it does not follow from the very models used to derive them.
For the model in Judd (1985), we prove that the long run tax on
capital is positive and significant, whenever the intertemporal
elasticity of substitution is below one.  For higher elasticities,
the tax converges to zero but may do so at a slow rate, after
centuries of high capital taxation.  The model in Chamley (1986)
imposes an upper bound on capital taxation and we prove that the tax
rate may end up at this bound indefinitely.  When, instead, the
bounds do not bind forever, the long run tax is indeed zero; however,
when preferences are recursive but non-additive across time, the
zero-capital-tax limit comes accompanied by zero private wealth (zero
tax base) or by zero labor taxes (first best).  Finally, we explain
why the equivalence of a positive capital tax with ever rising
consumption taxes does not provide a firm rationale against capital


3 Responses to “Let the Food Fight Begin!”

  1. Gabriel Wittenberg says:

    I suppose I’m just being anti-science, but riddle me this: How the fuck does anyone purport to know the elasticity of intertemporal substitution? How do the brainiacs in their ivory towers manage to control for everything and find out what we all would have consumed if interest rates were higher? I’m sure there are very sophisticated models that try to parse through the noise and zero in on something that resembles this abstract ratio, but I have not a clue on how we can ever test these figures. Isn’t part of science that a hypothesis has to be falsifiable? Or am I misreading my Popper?

    • wintercow20 says:

      I’m in your camp, a little more softly I suppose, but in it nonetheless. I wished I could write a “tell-all” about my prior career as an applied empirical economist – but that, as you know, would be in bad taste. Let’s just say I don’t send my old papers around to anyone, and you know from having had me that I don’t make anyone read them.

  2. Harry says:

    “…intertemporal elasticity…”

    Bertrand Russell would have gone on to distinguish between intertemporal an de temporal, just to send his readers down a path so they might be both intimidated and diverted from his argument. This is just plain bad writing, even if WC and Gabriel understand the academic language. It avoids confronting the question of how capital gains should be taxed and does not acknowledge the many complexities of the question, but rather rushes to an absurd conclusion.

    I give it an F, and that’s allowing for an undergraduate having just an hour to write the paper in his busy day. It is a good thing that other people making a living do not depend on this guy getting to the point.

    Wintercow and Gabriel both think more clearly, as they demonstrate.

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