On the Consequences of Eliminating Capital Tax Differentials

Abstract

In the United States structure and equipment capital are eectively taxed at dierent rates. Recently, President Obama joined the group of policy makers and economists who propose to eliminate these dierentials. This paper analyzes the consequences of such a reform using an incomplete markets model with equipment-skill complementarity. We nd that the reform increases average welfare by 0.1%. Importantly, we nd that the reform does not involve the usual eciency vs. equality trade-o: it improves both. JEL classication: E62, H21.