NotesECN741-page25

NotesECN741-page25 - ( s t ); ) W C ( C ( s t ) ,L ( s t );...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
ECN 741: Public Economics Fall 2008 One way to get this is to set the capital income taxes such that R ( s t +1 ) = R * ( s t +1 ) U m C ( C ( s t ) ,L ( s t ); ϕ ) W C ( C ( s t ) ,L ( s t ); ϕ,μ,λ ) W C ( C ( s t +1 ) ,L ( s t +1 ); ϕ,μ,λ ) U m C ( C ( s t +1 ) ,L ( s t +1 ); ϕ ) Note that FOC with respect to initial capital implies N X i =1 μ i k i 0 π i = 0 Example: Consider the following preferences U i ( c,y ) = c 1 - σ 1 - σ - α ( y/θ i ) γ γ Note that we have h i c ( C,L ; ϕ ) = ω i c C and h i y ( C,L ; ϕ ) = ω i y L , with ω i c = ( ϕ i ) 1 i π i ( ϕ i ) 1 and ω i y = ( θ i ) γ γ - 1 ( ϕ i ) - 1 γ - 1 i π i ( θ i ) γ γ - 1 ( ϕ i ) - 1 γ - 1 and therefore U m = Φ m u c 1 - σ 1 - σ - Φ m v α ( y/θ i ) γ γ and W = Φ W u c 1 - σ 1 - σ - Φ W v α ( y/θ i ) γ γ in which Φ m u , Φ m v , Φ W u and Φ W v are some constant. Note that this implies τ * ( C,L ) = 1 - Φ m v Φ m u Φ W u Φ W v Note also that U m C ( C ( s t ) ,L
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ( s t ); ) W C ( C ( s t ) ,L ( s t ); ,, ) W C ( C ( s t +1 ) ,L ( s t +1 ); ,, ) U m C ( C ( s t +1 ) ,L ( s t +1 ); ) = 1 and therefore R ( s t +1 ) = R * ( s t +1 ) which implies ( s t ) = 0 for all t 1 This implies that the result for optimal taxes on capital income holds from date zero (not just for t 1 as it was the case before). When k i = k for all i , taxing initial capital is 25...
View Full Document

Ask a homework question - tutors are online