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Revisiting Optimal Capital Taxation with the Spirit of Capitalism

Author

Listed:
  • Hao Li

    (Center for Economic Research, Shandong University, Jinan, China)

  • Gaowang Wang

    (Center for Economic Research, Shandong University, Jinan, China)

  • Jun Yu

    (School of Economics, Shanghai University of Finance and Economics
    Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, Shanghai, China)

Abstract

This article investigates optimal capital taxation within a two-sector growth model in which agents embody the spirit of capitalism. We demonstrate that the limiting capital income tax rate is generally not zero, with its sign determined by the utility specifications rather than the production technology. All three possible signs are illustrated using widely adopted utility functions. Additionally, the analysis reveals that the limiting consumption tax rate is indeterminate in the long run, while the optimal long-run taxes on labor income and expenditures for generating effective labor are both zero.

Suggested Citation

  • Hao Li & Gaowang Wang & Jun Yu, 2025. "Revisiting Optimal Capital Taxation with the Spirit of Capitalism," Annals of Economics and Finance, Society for AEF, vol. 26(2), pages 501-524, November.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:2:liwangyu
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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