Optimal Capital Taxation with Borrowing Constraints and Entrepreneurial Heterogeneity

Lorenzo Carbonari (), Fabrizio Mattesini () and Alberto Petrucci ()
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Lorenzo Carbonari: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it
Fabrizio Mattesini: DEF, University of Rome "Tor Vergata" & EIEF, http://www.ceistorvergata.it
Alberto Petrucci: Luiss University

No 614, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: This paper analyzes the optimal taxation of labor and various forms of capital in a model with entrepreneurial heterogeneity and financial frictions as in Itskhoki and Moll (2019a). We consider both a closed economy, populated by workers that buy corporate bonds, and a small open economy with hand-to-mouth workers where entrepreneurs finance capital by using their wealth and by borrowing abroad. The optimal fiscal policy differs depending on whether we consider the closed economy or the small open economy. In the former the taxes on labor and pure capital should be positive, while the tax on capital income should be zero. The wealth tax levied on workers and entrepreneurs and the pure capital tax levied on firms are equivalent fiscal instruments. When we consider a small open economy, we find that the pure capital tax should be set to zero but both the capital income tax and the labor tax should be positive. In this case the capital income tax and the wealth tax are perfect substitutes.

Keywords: Optimal capital taxation; Wealth accumulation; Financial frictions; Entrepreneurial heterogeneity. (search for similar items in EconPapers)
JEL-codes: E21 E60 H21 H30 O40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025-10-17, Revised 2025-10-17
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