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Optimal Fiscal Policy in Overlapping Generations Models

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In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.

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  • Garriga, Carlos, 2017. "Optimal Fiscal Policy in Overlapping Generations Models," Working Papers 2017-32, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2017-032
    DOI: 10.20955/wp.2017.032
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    Keywords

    Optimal taxation; uniform commodity taxation;

    JEL classification:

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

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