This paper studies the issue of the efficient taxation of capital income in intertemporal optimizing models with infinite horizons and endogenous population growth. We discover that, in the steady state, the optimal capital income tax is negative when the economy is closed. Instead, in a small open economy facing perfect capital mobility, the Chamley-Judd result of a zero tax rate is obtained if capital taxation is source-based; otherwise, income from wealth should be subsidized if taxation is residence-based. Moreover, we find that in our setup, taxing capital income with immediate expensing of capital expenditure may replicate the first-best equilibrium when labor is subsidized. Our findings, which depart substantially from those obtained in representative agent models with an endogenous labor supply, are to be ascribed to a wealth effect in the fertility choices that directly affects the pseudo-welfare function of the social planner.
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Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number
228.
Find related papers by JEL classification: E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Chari, V.V. & Kehoe, Patrick J., 1999.
"Optimal fiscal and monetary policy,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745
Elsevier.
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