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Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment

Author

Listed:
  • Juan Carlos Conesa

    (Stony Brook University)

  • Begona Dominguez

    (University of Queensland)

Abstract

Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero. In contrast, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For the case of a fiscal authority with utilitarian preferences, we find that labor tax rates should be cut down to 4 per cent while dividend tax rates should be increased to 42 per cent. (Copyright: Elsevier)

Suggested Citation

  • Juan Carlos Conesa & Begona Dominguez, 2020. "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 156-172, July.
  • Handle: RePEc:red:issued:19-30
    DOI: 10.1016/j.red.2019.11.006
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    Cited by:

    1. Juan Carlos Conesa & Begoña Domínguez, 2019. "The timing of optimal capital income tax reforms: the role of intangible capital investment," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 419-438, November.
    2. Chari, V.V. & Nicolini, Juan Pablo & Teles, Pedro, 2020. "Optimal capital taxation revisited," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 147-165.
    3. van Rens, Thijs & Vukotic, Marija, 2020. "Delayed Adjustment and Persistence in Macroeconomic Models," The Warwick Economics Research Paper Series (TWERPS) 1245, University of Warwick, Department of Economics.

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    More about this item

    Keywords

    Optimal policy; Capital taxes; Redistribution; Investment deductibility;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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