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Machines, Buildings, and Optimal Dynamic Taxes

Author

Listed:
  • Hakki Yazici

    (Sabanci University)

  • Ctirad Slavik

    (Goethe University in Frankfurt)

Abstract
The effective marginal tax rates on returns to capital assets show considerable amount of variation depending on the asset type in the U.S. corporate tax code. For instance, the effective marginal tax rate on the return to communications equipment is 19% whereas it is above 35% for non-residential buildings. This feature of the tax code has been the subject of a growing debate among policymakers, because it contributes to the existence of signicant gaps between the effective tax rates faced by companies in different industries. President Obama recently called for a reform to abolish the tax rules that create differential axation of capital assets in order to "level the playing field" across companies. In contrast to the extent of these policy debates, there has been little research on whether differential taxation of capital income based on capital type is a desirable feature of the tax code. In this paper, we take a step in this direction. Our theory confirms the optimality of differential capital asset taxation, but with an important caveat. Capital assets can be divided into two groups based on the tax treatment they receive in the U.S. tax code: structures and equipment. As documented by Gravelle (2011), in the current U.S. tax code the effective tax rate on equipment capital is on average 6% below the effective tax rate on structure capital. In contrast, our theory suggests that capital equipment should be taxed at a higher rate than capital structures. We conduct a quantitative exercise to assess the quantitative importance of optimal differential capital taxation. In our baseline calibration we find that the tax rate on capital equipments should be at least 19% higher than the tax rate on structure capital.

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  • Hakki Yazici & Ctirad Slavik, 2013. "Machines, Buildings, and Optimal Dynamic Taxes," 2013 Meeting Papers 766, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:766
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    3. Castex, Gonzalo & (Stanley) Cho, Sang-Wook & Dechter, Evgenia, 2022. "The decline in capital-skill complementarity," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    4. Mr. Andrew Berg & Lahcen Bounader & Nikolay Gueorguiev & Hiroaki Miyamoto & Mr. Kenji Moriyama & Ryota Nakatani & Luis-Felipe Zanna, 2021. "For the Benefit of All: Fiscal Policies and Equity-Efficiency Trade-offs in the Age of Automation," IMF Working Papers 2021/187, International Monetary Fund.
    5. Laurence Ales & Antonio Andres Bellofatto & Jessie Jiaxu Wang, 2017. "Taxing Atlas: Executive Compensation, Firm Size and Their Impact on Optimal Top Income Tax Rates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 62-90, October.
    6. Laurence Ales & Kurnaz Musab & Sleet Christopher, "undated". "Task, Talent, and Taxes," GSIA Working Papers 2014-E16, Carnegie Mellon University, Tepper School of Business.
    7. Yi‐Chan Tsai & C. C. Yang & Hsin‐Jung Yu, 2022. "Rising skill premium and the dynamics of optimal capital and labor taxation," Quantitative Economics, Econometric Society, vol. 13(3), pages 1061-1099, July.
    8. Ctirad Slavík & Hakki Yazici, 2019. "On the consequences of eliminating capital tax differentials," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 225-252, February.
    9. Hideto Koizumi, 2023. "On the implementability of a "robot tax"," Economics Bulletin, AccessEcon, vol. 43(2), pages 759-768.
    10. Uwe Thuemmel, 2018. "Optimal Taxation of Robots," CESifo Working Paper Series 7317, CESifo.
    11. Ivo Bakota, 2020. "Capital Income Taxation with Portfolio Choice," CERGE-EI Working Papers wp668, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    12. Burkhard Heer & Andreas Irmen & Bernd Süssmuth, 2023. "Explaining the decline in the US labor share: taxation and automation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1481-1528, December.
    13. Pablo Casas & José L. Torres, 2024. "Government size and automation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(3), pages 780-807, June.
    14. Jonas Loebbing, 2020. "Redistributive Income Taxation with Directed Technical Change," CESifo Working Paper Series 8743, CESifo.
    15. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    16. Maren Froemel & Charles Gottlieb, 2021. "The Earned Income Tax Credit: Targeting the poor but crowding out wealth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 193-227, February.
    17. Loebbing, Jonas, 2020. "Redistributive Income Taxation with Directed Technical Change," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224606, Verein für Socialpolitik / German Economic Association.
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