On the Optimality of Differential Asset Taxation

Thomas Phelan

No 19-17R2, Working Papers from Federal Reserve Bank of Cleveland

Abstract: In this paper 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. Further, 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, while the remaining instruments determine the efficient mean and variance of entrepreneurs' consumption growth.

Keywords: Optimal taxation; moral hazard; optimal contracting (search for similar items in EconPapers)
JEL-codes: D61 D63 E62 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2019-08-29, Revised 2025-02-04
New Economics Papers: this item is included in nep-dge, nep-ent, nep-mac, nep-ore, nep-pbe and nep-pub
Note: Replication files may be found at https://github.com/tphelanECON/diff_cap_tax
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:191700

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DOI: 10.26509/frbc-wp-201917r2

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