Optimal Capital Taxation Revisited

V. V. Chari, Consultant

Juan Pablo Nicolini, Senior Research Economist

Pedro Teles

September 2018 | Federal Reserve Bank of Minneapolis Staff Report 571

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.

DOI: https://doi.org/10.21034/sr.571

This is a revised version of Working Paper 752, which circulated with the same title.