Optimal taxation of business and individual incomes

Abstract

This paper applies the optimal taxation approach to two versions of Fisher's consumption and investment model. It then shows that eliminating the business or corporation income tax through full integration of this tax with the individual income tax is non-optimal by both efficiency and equity standards. In the case where business investment is financed completely by borrowing, the business income tax should be assigned to the goal of raising revenue efficiently, and the individual tax is associated only with the equity objective.