Approaches to Efficient Capital Taxation : Leveling the Playing Field vs. Living by the Golden Rule

This paper analyzes intersectoral and intertemporal efficiency effects of the Tax Reform Act of 1986 using a general equilibrium model that considers impacts of taxes on the allocation of capital across industries, assets, sectors, and time. The model pays close attention to capital adjustment dynamics. We find that the 1986 reform worsened the intertemporal efficiency of resource allocation by increasing marginal effective tax rates on various uses and types of capital. This negative efficiency effect is more than offset, however, by positive effects from an improved intersectoral allocation of capital and a reduction of labor market distortions