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Optimal Capital Taxation Revisited

Varadarajan Chari (), Juan Pablo Nicolini () and Pedro Teles ()

No 571, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We revisit the question of how capital should be taxed. We allow for a rich set of tax instruments that consists of taxes widely used in practice, including consumption, dividend, capital, and labor income taxes. We restrict policies to respect promises that the government has made in the previous period regarding the current value of wealth. We show that capital should not be taxed if households have preferences that are standard in the macroeconomics literature. We show that Ramsey outcomes that must respect such promises are time consistent. We show that the presumption in the literature that capital should be taxed for some length of time arises because the tax system is restricted.

Keywords: Time consistency; Production efficiency; Capital income tax (search for similar items in EconPapers)
JEL-codes: E60 E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac and nep-pbe
Date: 2018-09-28
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:571

DOI: 10.21034/sr.571

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