Working Paper

Should Capital Be Taxed?

Abstract: We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.

Keywords: Capital Taxation; Government Bonds; Heterogeneous Agents; Incomplete Markets; Modified Golden Rule; Ramsey Problem; wealth distribution;

JEL Classification: C61; E22; E62; H21; H30;

Status: Published in Economic Letters

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-09-26

Number: 2020-033

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