Optimal indirect and capital taxation

Mikhail Golosov; Narayana Kocherlakota; Aleh Tsyvinski

doi:10.1111/1467-937X.00256

Optimal indirect and capital taxation

Mikhail Golosov
, Narayana Kocherlakota
, Aleh Tsyvinski

Economics

Research output: Contribution to journal › Article › peer-review

224 Scopus citations

Abstract

We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period.

Original language	English (US)
Pages (from-to)	569-587
Number of pages	19
Journal	Review of Economic Studies
Volume	70
Issue number	3
DOIs	https://doi.org/10.1111/1467-937X.00256
State	Published - Jul 2003

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1111/1467-937X.00256

Cite this

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title = "Optimal indirect and capital taxation",

abstract = "We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period.",

author = "Mikhail Golosov and Narayana Kocherlakota and Aleh Tsyvinski",

note = "Funding Information: Acknowledgements. Kocherlakota acknowledges the support of NSF SES-0076315. Versions of this paper were presented at a large number of seminars and conferences; we thank the seminar participants for their comments. We thank the editor (Mark Armstrong) and two referees for their help. We also thank Yan Bai, Marco Bassetto, Florin Bidian, Harold Cole, Larry Jones, Barbara McCutcheon, Patrick Kehoe, Timothy Kehoe, Chris Phelan, Jing Zhang, Rui Zhao, and especially V. V. Chari for their comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.",

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AU - Golosov, Mikhail

AU - Kocherlakota, Narayana

AU - Tsyvinski, Aleh

N1 - Funding Information: Acknowledgements. Kocherlakota acknowledges the support of NSF SES-0076315. Versions of this paper were presented at a large number of seminars and conferences; we thank the seminar participants for their comments. We thank the editor (Mark Armstrong) and two referees for their help. We also thank Yan Bai, Marco Bassetto, Florin Bidian, Harold Cole, Larry Jones, Barbara McCutcheon, Patrick Kehoe, Timothy Kehoe, Chris Phelan, Jing Zhang, Rui Zhao, and especially V. V. Chari for their comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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N2 - We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period.

AB - We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period.

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JO - Review of Economic Studies

JF - Review of Economic Studies

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Optimal indirect and capital taxation

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