Optimal Capital Income Taxation
AbstractIn an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13354.
Date of creation: Aug 2007
Date of revision:
Note: EFG PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-02 (All new papers)
- NEP-DGE-2007-09-02 (Dynamic General Equilibrium)
- NEP-MAC-2007-09-02 (Macroeconomics)
- NEP-PBE-2007-09-02 (Public Economics)
- NEP-PUB-2007-09-02 (Public Finance)
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.:
- Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, .
"Assessing Dynamic Efficiency: Theory and Evidence,"
Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research
14-88, Wharton School Rodney L. White Center for Financial Research.
- Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 604.
- Kenneth L. Judd, 1982.
"Redistributive Taxation in a Simple Perfect Foresight Model,"
Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science
572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, Elsevier, vol. 28(1), pages 59-83, October.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
- Michael Sattinger, 2010. "Income Tax Incidence with Positive Population Growth," Discussion Papers, University at Albany, SUNY, Department of Economics 10-04, University at Albany, SUNY, Department of Economics.
- Francesco Menoncin & Paolo M. Panteghini, 2008.
"The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal,"
Working Papers, University of Brescia, Department of Economics
0806, University of Brescia, Department of Economics.
- Francesco Menoncin & Paolo M. Panteghini, 2013. "The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 69(1), pages 57-71, March.
- Francesco Menoncin & Paolo Panteghini, 2008. "The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal," CESifo Working Paper Series 2352, CESifo Group Munich.
- Backus, David & Henriksen, Espen & Storesletten, Kjetil, 2008.
"Taxes and the global allocation of capital,"
Journal of Monetary Economics, Elsevier,
Elsevier, vol. 55(1), pages 48-61, January.
- Jacques K. Ngoie & Niek Schoeman, 2012.
"Efficiency of Optimal Taxation in a Dynamic Stochastic Environment: Case of South Africa,"
287, Economic Research Southern Africa.
- Jacques Kibambe Ngoie & Niek Schoeman, 2012. "Efficiency of Optimal Taxation in a Dynamic Stochastic Environment: Case of South Africa," Working Papers 201218, University of Pretoria, Department of Economics.
- Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc.
- Matteo Bassi, 2008. "I Will Survive: Capital Taxation, Voter Turnout and Time Inconsistency," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 206, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Alberto Petrucci, 2007. "Optimal Taxation of Capital Income in Models with Endogenous Fertility," Development Working Papers, Centro Studi Luca d\'Agliano, University of Milano 228, Centro Studi Luca d\'Agliano, University of Milano.
- Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(8), pages 983-995.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.