A Note on the Optimality of the Cash Flow Tax

Pablo Serra and Daniel Hojman ()

No 83, Documentos de Trabajo from Centro de Economía Aplicada, Universidad de Chile

Abstract: This paper analyzes the optimal tax policy within an endoge-nous growth model with productive government spending. We consider a one-factor (human capital) one-good economy, with the latter serving both as a final and an intermediate good. The government levies taxes in order to finance the provision of the intermediate good. Within this framework we show a highly intuitive result: the optimal tax structure is a 100 percent tax on cash flows and no tax on labor income. As a consequence, the consumption tax causes a deadweight loss, which increases with the intensity of use of the intermediate good.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:edj:ceauch:83

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