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 those that respect pre-existing promises regarding the current value of wealth. We show that capital should not be taxed (i.e. there should be no intertemporal distortions), 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.
Bibliographical noteFunding Information:
We thank Isabel Correia, Jo?o Guerreiro, Patrick Kehoe, Albert Marcet, Ellen McGrattan, Chris Phelan, Catarina Reis, and Ivan Werning for helpful discussions, and the editor and three referees for very useful comments. Chari thanks the NSF for supporting the research in this paper, and Teles is grateful for the support of FCT as well as the ADEMU project, ?A Dynamic Economic and Monetary Union,? funded by the European Union's Horizon 2020 Program under grant agreement 649396. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, Banco de Portugal, or the European System of Central Banks.
© 2019 Elsevier B.V.
- Capital income tax
- Production efficiency
- Time consistency