Optimal Capital Taxation under Limited Commitment

YiLi Chien and Junsang Lee

No 430, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: We study optimal capital taxation under limited commitment. We prove that the optimal tax rate on capital income should be positive in steady state and should be increasing over time provided that full risk-sharing is not feasible. In a limited commitment environment, a one unit increase of capital investment by an agent increases all individualsÂ’ autarky values in the economy and generates externality costs in the economy. This externality cost provides a rationale for positive capital taxation even in the absence of government expenditure. Moreover, we show that both this externality cost of capital investment and the optimal tax rate are potentially much bigger than one might expect

Keywords: Optimal fiscal policy; limited enforcement (search for similar items in EconPapers)
JEL-codes: E22 E62 E63 (search for similar items in EconPapers)
Date: 2006
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Related works:
Working Paper: Optimal capital taxation under limited commitment (2009)
Working Paper: Optimal Capital Taxation Under Limited Commitment (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:430

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