Capital income taxation in a two-commodity life cycle model: The role of factor intensity and asset capitalization effects

Abstract

This paper discusses the impact of changes in capital income taxation in a two-commodity life cycle general equilibrium growth model. In contrast to the Solow-Swan one-commodity framework which has been used in previous life cycle policy simulation [Summers (1981), Auerbach et al. (1983), Auerbath and Kotlikoff (1983, 1987)], we use a two-commodity Uzawa (1961, 1963) type model.’ Consumption and capital goods are separately identitied, with an endogenously determined relative price between them. As a result, both asset capitalization effects (changes in the relative price of capital and consumption goods) and factor intensity effects across sectors are captured.’ Calculations with the model suggest that both of these effects