Wednesday, September 30, 2015

Information equilibrium and the taxation of capital

Brad DeLong links us to Marshall Steinbaum, who mentions a rationale behind zero tax rates for capital:
... the ideological justification for low and falling rates of taxation on capital is the Chamley–Judd Theorem, which “proves” that the optimal tax rate on capital is zero in the long run. According to the theorem, anything more destroys the incentive to save and thus the productive capacity of the economy.
In the information transfer model, we don't have intertemporal maximization via decisions based on rates of return or utility. The aspect of the model that produces consumption smoothing and the resulting capital investment is simply the existence of many time periods. Because there are many time periods, creating a high dimensional space (each time period is a dimension), nearly all the points are close to the boundary -- even for random agent choices. That is a distribution which tends to maximize most commonly used utility functions. That includes the function used by Judd [pdf].

Therefore, since capital taxation doesn't change the random behavior of the agents, you don't get agents changing their intertemporal optimization.

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