On the Optimality of Differential Asset Taxation

RePEc Short ID: pph158
ORCID iD: 0000-0002-5904-5065

Phelan, Tom

doi:10.26509/frbc-wp-201917r2

Working Paper Revision

On the Optimality of Differential Asset Taxation

Abstract: In this paper I study the optimality of differential asset taxation in an environment with entrepreneurs and workers in which output is stochastic and entrepreneurs can misreport profits and abscond with capital. I show that a stationary efficient allocation may be implemented as an equilibrium with endogenous collateral constraints, transfers to newborns, and linear taxes on profits, investment, and interest. Further, these taxes differ from one another and serve distinct purposes. The profits tax shares risk and depends solely on the severity of the misreporting friction, while the remaining instruments determine the efficient mean and variance of entrepreneurs' consumption growth.

Keywords: Optimal taxation; moral hazard; optimal contracting;

JEL Classification: D61; D63; E62;

https://doi.org/10.26509/frbc-wp-201917r2