CFCM 14/11: Tax smoothing in a business cycle model with capital-skill complementarity

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.

Download the paper in PDF format

Now published in Journal of Economic Dynamics and Control (Vol 51, February 2015; pages 420–44)

Authors

Konstantinos Angelopoulos, Stylianos Asimakopoulos and James Malley

View all CFCM discussion papers | View all School of Economics featured discussion papers