Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment

Juan Carlos Conesa and Begoña Domínguez

Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an innitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 percent at steady state.

Date: 2018
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-dge, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment (2020)
Working Paper: Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:nys:sunysb:18-10

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