Coordinated State Capital Tax Reform in an Overlapping Generations Model

The analysis described in this chapter examines whether a coordinated state capital tax reform improves steady-state social welfare an overlapping generations (OLG) model with vertical and horizontal tax externalities. We show that an OLG model introduces dynamic efficiency and dynamic vertical externality effects, neither of which appear in static models. In particular, we show that the sign of the dynamic vertical tax externality effect depends on whether each state government ignores the effect of its own tax rate on federal tax revenue.