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Optimal Capital Taxation Revisited

Author

Listed:
  • Chari, V. V.

    (Federal Reserve Bank of Minneapolis)

  • Nicolini, Juan Pablo

    (Federal Reserve Bank of Minneapolis)

  • Teles, Pedro

    (Banco de Portugal)

Abstract

We revisit the question of how capital should be taxed. We allow for a rich set of tax instruments that consists of taxes widely used in practice, including consumption, dividend, capital, and labor income taxes. We restrict policies to respect promises that the government has made in the previous period regarding the current value of wealth. We show that capital should not be taxed if households have preferences that are standard in the macroeconomics literature. We show that Ramsey outcomes that must respect such promises are time consistent. We show that the presumption in the literature that capital should be taxed for some length of time arises because the tax system is restricted.

Suggested Citation

  • Chari, V. V. & Nicolini, Juan Pablo & Teles, Pedro, 2018. "Optimal Capital Taxation Revisited," Staff Report 571, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:571
    DOI: 10.21034/sr.571
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    References listed on IDEAS

    as
    1. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
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    More about this item

    Keywords

    Capital income tax; Time consistency; Production efficiency;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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