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Optimal Indirect and Capital Taxation

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  • Mikhail Golosov
  • Narayana Kocherlakota
  • Aleh Tsyvinski

Abstract

We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period. Copyright 2003, Wiley-Blackwell.

Suggested Citation

  • Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
  • Handle: RePEc:oup:restud:v:70:y:2003:i:3:p:569-587
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