Abstract
The analysis described in this chapter examines whether a coordinated state capital tax reform improves steady-state social welfare an overlapping generations (OLG) model with vertical and horizontal tax externalities. We show that an OLG model introduces dynamic efficiency and dynamic vertical externality effects, neither of which appear in static models. In particular, we show that the sign of the dynamic vertical tax externality effect depends on whether each state government ignores the effect of its own tax rate on federal tax revenue.
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- 1.
For simplicity, we assume that the young generation cannot receive benefits from federal and state public goods. This simplification does not affect our main implications.
- 2.
- 3.
In the steady state, we omit the subscript t.
- 4.
See Keen and Kotsogiannis’ (2002) Eq. 2.8, which sets the rent tax rate equal to zero \( \left( {\theta = 0} \right) \). Strictly speaking, the first term in Eq. 2.12 is also a dynamic effect relating to the capital accumulation effect. However, we regard this effect as a static effect because a similar effect arises in Keen and Kotsogiannis’ (2002) model through rent.
- 5.
All of the welfare responses are evaluated at the steady-state equilibrium. The analysis focuses on the indirect effects that operate through the interest rate because the direct effects drop out when the optimal policy rule and the envelope theorem are applied.
- 6.
Here, following Keen and Kotsogiannis (2002), we depart from the assumption that \( k_{R} < 0 \) to explain an economic interpretation.
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Shinozaki, T., Kato, H., Kunizaki, M. (2019). Coordinated State Capital Tax Reform in an Overlapping Generations Model. In: Kunizaki, M., Nakamura, K., Sugahara, K., Yanagihara, M. (eds) Advances in Local Public Economics . New Frontiers in Regional Science: Asian Perspectives, vol 37. Springer, Singapore. https://doi.org/10.1007/978-981-13-3107-7_2
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DOI: https://doi.org/10.1007/978-981-13-3107-7_2
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