Optimal Capital Income Taxes in the infinite horizon model with Progressive Income Taxes

In infinitely lived, representative-agent models with linear income taxes, the influential studies by Chamley (1986) and Judd (1985) have shown that the optimal capital tax is zero in the long run. Our paper studies otherwise the same model except for progressive taxes and the results are as follow. First, the long-run optimal capital income tax is positive under progressive income taxes. Second, the welfare gain of tax reforms from current tax rates toward positive optimal income taxes under progressive tax rates is larger than that toward a zero capital income tax under linear income taxes. Our findings lend support to positive capital income taxes under a system of progressive income taxes adopted in developed countries since the late 19th century.