Optimal capital income taxation
By: Andrew B. Abel.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13354.; Working paper series (National Bureau of Economic Research) -- working paper no. 13354.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 38
Subjects: Capital investments -- Taxation -- Mathematical models
Description: In an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
Notes: "August 2007"

Includes bibliographical references (p. 38).

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