Revisiting Optimal Capital Taxation with the Spirit of Capitalism

Hao Li (), Gaowang Wang and Jun Yu ()
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Hao Li: Center for Economic Research, Shandong University, Jinan, China
Jun Yu: School of Economics, Shanghai University of Finance and Economics

Annals of Economics and Finance, 2025, vol. 26, issue 2, 501-524

Abstract: This article investigates optimal capital taxation within a two-sector growth model in which agents embody the spirit of capitalism. We demonstrate that the limiting capital income tax rate is generally not zero, with its sign determined by the utility specifications rather than the production technology. All three possible signs are illustrated using widely adopted utility functions. Additionally, the analysis reveals that the limiting consumption tax rate is indeterminate in the long run, while the optimal long-run taxes on labor income and expenditures for generating effective labor are both zero.

Keywords: The spirit of capitalism; Capital income taxation; Two-sector models (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2025:v:26:i:2:liwangyu

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