Taxing Capital? Not a Bad Idea after All!
Juan Carlos Conesa, Sagiri Kitao, Dirk Krueger
American Economic Review · 2009 · Volume 99 · Issue 1
Abstract
We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life-cycle structure of the model, whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system. (JEL E13, H21, H24, H25)
Keywords
General Aggregative Models: Neoclassical, Taxation and Subsidies: Efficiency, Optimal Taxation, Personal Income and Other Nonbusiness Taxes and Subsidies, includes inheritance and gift taxes, Business Taxes and Subsidies including sales and value-added (VAT)
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