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Capital Taxation and Government Debt Policy with Public Discounting

Discussion Papers 1697, 37 S.

Malte Rieth


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Published in: Journal of Economic Dynamics & Control 85 (2017), S. 1-20


This paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty. The government has access to linear taxes on capital and labor, and to non-state-contingent bonds. Government impatience generates positive and empirically realistic longrun levels of both capital taxes and public debt. Prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries, alongside other statistics. The paper then presents econometric evidence that countries with higher political instability, used as an approximation of unobservable public discount rates, have both higher capital taxes and debt.

Malte Rieth

Research Associate in the Macroeconomics Department

JEL-Classification: E62;H21;H63;C23
Keywords: Fiscal policy, prior predictive analysis, political instability, macro panel, Ramsey optimal policy
Frei zugängliche Version: (econstor)