Tax smoothing in a business cycle model with capital-skill complementarity

Konstantinos Angelopoulos, Stylianos Asimakopoulos, James Malley

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity and endogenous skill acquisition under technology and public expenditure shocks. We find that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition, as well as when the relative skill supply is exogenously determined. We further find that the government finds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long-run and the standard deviation of this wedge over the business cycle. This is achieved by subsidising skill creation and taxing both types of labour income.
Original languageEnglish
Pages (from-to)420-444
Number of pages25
JournalJournal of Economic Dynamics and Control
Volume51
Early online date12 Nov 2014
DOIs
Publication statusPublished - 1 Feb 2015

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Business cycle model
Capital-skill complementarity
Tax smoothing
Skill acquisition
Exogenous shocks
Labor income
Skilled labor
Unskilled labour
Business cycles
Externalities
Debt
Public expenditure
Government
Marginal rate of substitution
Standard deviation
Optimal tax
Labor tax

Keywords

  • Skill premium
  • tax smoothing
  • optimal fiscal policy

Cite this

Tax smoothing in a business cycle model with capital-skill complementarity. / Angelopoulos, Konstantinos; Asimakopoulos, Stylianos; Malley, James.

In: Journal of Economic Dynamics and Control, Vol. 51, 01.02.2015, p. 420-444.

Research output: Contribution to journalArticle

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