Optimal Capital Income Taxes in the infinite horizon model with Progressive Income Taxes

Been-Lon Chen and Chih-Feng Lai ()
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Chih-Feng Lai: Department of Economics, Soochow University, https://web-en.scu.edu.tw/econ/web_page/687

No 19-A004, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: In infinitely lived, representative-agent models with linear income taxes, the influential studies by Chamley (1986) and Judd (1985) have shown that the optimal capital tax is zero in the long run. Our paper studies otherwise the same model except for progressive taxes and the results are as follow. First, the long-run optimal capital income tax is positive under progressive income taxes. Second, the welfare gain of tax reforms from current tax rates toward positive optimal income taxes under progressive tax rates is larger than that toward a zero capital income tax under linear income taxes. Our findings lend support to positive capital income taxes under a system of progressive income taxes adopted in developed countries since the late 19th century.

Keywords: : infinite horizon model; optimal capital income taxation; progressive taxes (search for similar items in EconPapers)
JEL-codes: E1 E6 H2 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2018-08
New Economics Papers: this item is included in nep-dge, nep-mac, nep-ore and nep-pbe
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