تورم و سود سرمایه مالیات در یک اقتصاد کوچک باز

Inflation distorts an economy through many channels. This paper highlights the interaction between inflation and capital gains tax and their distortions to a small open economy through the financial market. This research captures several observations. First, capital formation or investment is an important channel for consumption smoothing over the life cycles. Second, capital gains are taxed only when the gains are realized. Third, inflation introduces an upward bias in the calculation of tax base. Thus, a capital gains tax in the presence of inflation can have a significant welfare effect even though its contribution to the government revenue is relatively small. The quantitative analysis shows that high inflation alone can lower social welfare. This problem becomes more severe when capital gains tax is introduced in an inflationary economy. The implicit inflation tax can be more hazardous to the economy than the explicit counterpart.

As the financial markets mature in a modern economy, capital gains tax concerns more to economists and policy makers. This tax has been adopted in a certain number of countries such as Canada and the United States. The pros and cons has been discussed extensively in the literature.1 However, the literature typically focuses on the effect of capital gains tax on portfolio choices and asset returns. It has ignored the joint distortion of capital gains tax and inflation tax.2 By constructing a life-cycle economy, we plan to investigate how capital gain tax distorts consumption and investment decisions in an inflationary economy. We are more interested in the policy implications to some small open economies such as Canada and Hong Kong. The consequences of such a distortion on individuals' behavior may be complicated. On the one hand, inflation imposes a tax through the cash-in-advance constraint and encourages investors to reallocate their portfolio towards capital.3 On the other hand, capital gains tax will decrease the total amount of investment. This in turn will affect the wage rates. In addition, purchasing power is also redistributed to the “poor” through the transfer financed by taxes. The total effect on consumption and other macro variables is very complicated, and therefore a dynamic general equilibrium model is developed to capture and quantify these interactions. This paper attempts to quantify the joint welfare loss due to inflation and capital gains taxes in a small open economy.4 As it is standard in the literature, the interest rate in the small economy is assumed to be constant and determined in the world capital market. Then the paper provides some estimates of the welfare cost of inflation and captain gains tax.5 The general equilibrium inflation tax literature typically focuses on the distortions related to the “real side” of the economy.6 This paper, however, concerns how inflation distorts the economy through the financial side. In spirit, this paper is close to Altig and Carlstrom (1991) which analyzes how inflation amplifies the distortion caused by the income tax. However, our model is different from theirs in two ways. First, in their model money acts as a unit of account only, while here money exists as a medium of exchange. In addition, inflation is also a vehicle of income redistribution in this paper. Second, they focus on capital income tax but this paper studies the capital gains tax, which applies only when investors decide to realize the nominal gain. It has the “option feature.” Postponement of the sale of capital is coupled with the deferral of capital gains tax. To quantify such a discontinuity in the income stream as well as the tax payment, this paper adopts an algorithm different from many of the existing studies, which is a generalization of Imrohoroglu, Imrohoroglu, and Joines (1993). The next section provides a formal description of the baseline model. Section 3 describes the calibration and discusses the results. The final section concludes.

For decades, economists have tried to identify channels through which inflation distorts the economy. This paper highlights the interaction between inflation and a distorting tax in the financial market in a small open economy. It is demonstrated that asset holding over the life cycle as well as aggregate capital accumulation are significantly affected by the change in inflation and capital gains tax rate. In an economy without capital gains tax, an increase in the inflation rate from 4% to 10% can result in a social welfare cost equivalent to a deduction in 0.93% consumption of each consumer. When there is a moderate capital gains tax, the same change in the inflation rate will imply an additional 0.4% deduction in the each consumption. While these numbers are larger than the figures typically found in the literature, it still seems to be relatively small for policy considerations. There are several possible reasons for that. The real interest rate is fixed here (the small open economy assumption). Economic growth is assumed away. The labor supply is also assumed to be fixed here. The cash-in-advance constraint applies only to consumption but not investment goods. We did not consider the welfare cost along the transition path. If these assumptions are relaxed, it would lead to a bigger effect.23 We left these extensions to future research. In sum, this paper identifies the channel through which inflation generates a relatively large welfare cost. In addition, this paper supplements the literature of overlapping generations model with money. It shows that the money transfer as wealth transfer can have significant consequences on the social welfare. An ongoing extension includes idiosyncratic shocks in the model and an examination of the welfare cost of the joint distortions.24 A side product of this research is to provide an algorithm to solve a life-cycle portfolio problem in a general equilibrium context when there are some “thresholds” in asset trading.25 The thresholds studied in this paper are totally artificial and created by a distorting government policy, namely, capital gains tax. The algorithm developed here can be modified to study other thresholds in financial markets like the artificially large denomination of assets such as government bonds and individual household capital investment.Aiyagari Gertler 10, Gomme 1993, Imrohoroglu Prescott 1991, Imrohoroglu 1992, Internal Revenue Service 1987, International Financial Statistics, CD-ROM, IMF., Lucas 1972, Slemrod 1982 and Zhang 1995