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Taxing Capital? Not a Bad Idea after All!

Author

Listed:
  • Juan Carlos Conesa
  • Sagiri Kitao
  • Dirk Krueger

Abstract

We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life-cycle structure of the model, whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system. (JEL E13, H21, H24, H25)

Suggested Citation

  • Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    • Handle: RePEc:aea:aecrev:v:99:y:2009:i:1:p:25-48
    Note: DOI: 10.1257/aer.99.1.25
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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Taxing Capital? Not a Bad Idea after All! (AER 2009) in ReplicationWiki
    2. Economic Logic blog

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