On the consequences of eliminating capital tax differentials

In the United States structure and equipment capital are effectively taxed at different rates. Recently, President Obama joined the group of policy makers and economists who propose to eliminate these differentials. This paper analyzes the consequences of such a reform using an incomplete markets model with equipment-skill complementarity. We find that the reform increases average welfare by approximately 0.1 %. Importantly, we find that the reform does not involve the usual efficiency vs. equality trade-off: it improves both.