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Taxing capital income: a bad idea

Author

Listed:
  • V. V. Chari
  • Andrew Atkeson
  • Patrick J. Kehoe

    (Stanford University
    University of Minnesota
    Federal Reserve Bank of Minneapolis
    Harvard University)

Abstract

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley?s assumptions, one by one, to see if the result still holds. It does. This study unifies the work of other researchers, who have confirmed the result independently using different types of models and approaches. This study uses just one type of model (discrete time) and just one approach (primal). Chamley?s result holds when agents are heterogeneous rather than identical, the economy?s growth rate is endogenous rather than exogenous, the economy is open rather than closed, and agents live in overlapping generations rather than forever. (With this last assumption, the result holds under stricter conditions than with the others.)

Suggested Citation

  • V. V. Chari & Andrew Atkeson & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue sum, pages 3-17.
    • Handle: RePEc:fip:fedmqr:y:1999:i:sum:p:3-17:n:v.23no.3
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    References listed on IDEAS

    as
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    4. Edward C. Prescott & Patrick J. Kehoe & V. V. Chari, 1988. "Time consistency and policy," Staff Report 115, Federal Reserve Bank of Minneapolis.
    5. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-652, August.
    6. David Cass, 1964. "Optimum Economic Growth in an Aggregative Model of Capital Accumulation: A Turnpike Theorem," Cowles Foundation Discussion Papers 178, Cowles Foundation for Research in Economics, Yale University.
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    13. David Cass, 1965. "Optimum Growth in an Aggregative Model of Capital Accumulation," Review of Economic Studies, Oxford University Press, vol. 32(3), pages 233-240.
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