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On The Optimality Of Differential Asset Taxation

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  • Thomas Phelan

Abstract

In this article, I study the optimality of differential asset taxation in an environment with entrepreneurs and workers in which output is stochastic and entrepreneurs can misreport profits and abscond with capital. I show that a stationary efficient allocation may be implemented as an equilibrium with endogenous collateral constraints, transfers to newborns, and linear taxes on profits, investment, and interest. Furthermore, these taxes differ from one another and serve distinct purposes. The profits tax shares risk and depends solely on the severity of the misreporting friction, whereas the remaining instruments determine the efficient mean and variance of entrepreneurs' consumption growth.

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  • Thomas Phelan, 2025. "On The Optimality Of Differential Asset Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(1), pages 53-78, February.
    • Handle: RePEc:wly:iecrev:v:66:y:2025:i:1:p:53-78
    DOI: 10.1111/iere.12753
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