Tax Policy and Capital Allocation

Summary The purpose of this paper is to analyze the impact of U.S. tax policy on the efficiency of capital allocation. To achieve this objective, we employ an intertemporal general equilibrium model of the U.S. economy, implemented econometrically for annual data covering the period 1955-1980. We present a detailed model of the provisions of U.S. tax law applicable to income from capital. We use intertemporal equilibrium paths corresponding to alternative tax policies to evaluate proposals for tax reform. We find that dramatic gains in economic welfare would result from a shift from direct to indirect taxation.