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German Working Papers in Law and Economics
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Volume 2006

AUTHOR:
Marc Steffen Rapp

TITLE:
Security Income Taxes in a Dynamic Semi-Closed Economy

SUGGESTED CITATION:
Marc Steffen Rapp (2006) "Security Income Taxes in a Dynamic Semi-Closed Economy", German Working Papers in Law and Economics: Vol. 2006: Article 30.
http://www.bepress.com/gwp/default/vol2006/iss1/art30


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ABSTRACT:

This paper analyzes security income taxes in a dynamic two-period model of an economy that is part of a cluster of economies with perfectly integrated bond markets but locally segmented equity markets. For an economic income tax, it is shown that if tax proceeds are immediately redistributed within the cohort of market participants, taxation is non-distortionary in the sense that neither optimal production decisions of firms, nor the optimal aggregate consumption path or security prices are affected by taxation. If, however, tax proceeds are transferred to 'outsiders', i.e. non-market-participants, a shift in the tax rate in general affects the optimal aggregate consumption path and equilibrium security prices reflect the prevailing tax rate. While the equilibrium analysis is concerned with a rather stylized tax code, it is argued that the analysis may be interpreted as a partial equilibrium analysis of capital gains taxes within more general tax systems.




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