An Early Capital Taxation Principle

Gaetano Bloise and Pietro Reichlin

No 21611, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We reinterpret the classical zero long-run capital tax result as the steady-state implication of a broader intertemporal timing principle. In a standard Ramsey environment, capital and labor taxation are both distortionary instruments, and the planner uses capital taxation to shift distortions across dates by front-loading them relative to labor taxation. The asymptotic disappearance of capital taxation therefore reflects the exhaustion of this intertemporal margin rather than a primitive ranking of fiscal instruments. We substantiate this interpretation through two conceptual experiments. First, restricting government asset accumulation can sustain positive long-run capital taxation. Second, a present-value decomposition of the government’s intertemporal budget shows that capital wedges may account for virtually the entire financing of public expenditures even when capital tax rates converge to zero. These results suggest that the Ramsey logic is fundamentally about the optimal sequencing of distortions across time, rather than the long-run superiority of labor taxation.

Keywords: Capital taxation; Dynamically optimal taxation (search for similar items in EconPapers)
JEL-codes: E20 E21 E60 H2 H21 (search for similar items in EconPapers)
Date: 2026-06
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