Time and the Social Discount Rate

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI:
Time and the Social Discount Rate

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Many policies impact on inter-temporal consumption choices, with taxes on capital income being the most obvious example. This chapter examines the welfare effects of linear and non-linear personal income taxes, as well as taxes on corporate income, in a two-period setting. The shadow discount rate obtained by Harberger (1969) and Sandmo and Dre_ze (1971) is personalized in the presence of non-linear income taxes, while the corporate tax is included using the Miller (1977) equilibrium, in which consumers specialize in holding debt or equity, solely on the basis of their tax preferences. A risk premium is included in the social discount rate using the capital asset pricing model (CAPM), and arguments by Arrow and Lind (1970) for using a lower risk premium for public sector projects are also examined.

Keywords: Arrow–Lind Theorem; corporate tax; income taxation; progressive marginal tax rates; risk premium; social discount rate

Chapter.  14683 words.  Illustrated.

Subjects: Public Economics

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