Optimal Capital Tax Research Articles

Comment imposer le capital ?

Nous presentons et discutons les principaux resultats theoriques concernant l'imposition optimale du capital et nous les illustrons par un ensemble de simulations. Apres avoir montre qu'il etait souhaitable d'eviter la double imposition du capital investi dans l'entreprise, nous caracterisons les taux d'imposition optimaux, en mettant l'accent sur leur profil temporel, alors que la litterature tend a se restreindre a l'etude de la situation de long terme. Nous montrons que le celebre resultat de Chamley, Judd et Jones-Manuelli-Rossi prend une forme differente selon le modele dans lequel il s'applique. Les distorsions introduites par l'imposition du capital sont importantes mais ne conduisent pas a preconiser une absence totale d'imposition.

Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency

Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of welfare heterogeneity between these two groups for the determination of optimal capital and labor income taxes in a model with matching frictions in the labor market. In line with a recent finding in the literature, we find that the optimal capital tax is typically non-zero because it is used to indirectly mitigate an externality along the extensive labor margin that arises from search and matching frictions. However, the consideration of heterogeneity makes our result differ in an important way: even for a well-known parameter configuration (the Hosios condition) that typically eliminates this externality, we show that the optimal capital income tax is still non-zero. We also show that labor adjustment along the intensive margin has an important effect on efficiency at the extensive margin, and hence on the optimal capital tax, independent of welfare heterogeneity. Taken together, our results show that these two empirically-relevant features of the labor market can have a quantitatively-important effect on the optimal capital tax.

Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency

Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of welfare heterogeneity between these two groups for the determination of optimal capital and labor income taxes in a model with matching frictions in the labor market. In line with a recent finding in the literature, we find that the optimal capital tax is typically non-zero because it is used to indirectly mitigate an externality along the extensive labor margin that arises from search and matching frictions. However, the consideration of heterogeneity makes our result differ in an important way: even for a well-known parameter configuration (the Hosios condition) that typically eliminates this externality, we show that the optimal capital income tax is still non-zero. We also show that labor adjustment along the intensive margin has an important effect on efficiency at the extensive margin, and hence on the optimal capital tax, independent of welfare heterogeneity. Taken together, our results show that these two empirically-relevant features of the labor market can have a quantitatively-important effect on the optimal capital tax.

Public debt and optimal taxes without commitment

Benhabib and Rustichini [Optimal taxes without commitment, J. Econ. Theory 77 (1997) 231–259] study the properties of optimal capital taxes in economies without commitment and no government debt. They find that capital taxes may be different from zero at steady state. This note shows that, once governments have the possibility of issuing debt and smoothing taxes over time, optimal steady state capital taxes turn out to be zero.

A note on unemployment and capital tax competition

We introduce a labor market imperfection into the capital tax competition literature to study the equilibrium tax formulae and their efficiency in the presence of unemployment. Since we allow for labor market imperfection, the standard conclusions of the tax competition literature would be generalized in the case of non-full employment. Our first result shows that even when head taxes on immobile residents are available, the optimal capital tax rate for jurisdictional governments is not zero. Our second finding is that decentralized equilibrium might be characterized by the overprovision of local public goods when the labor market is imperfect.

Identifying optimal contingent fiscal policies in a business cycle model

Optimal fiscal policy is indeterminate in a dynamic and stochastic environment. The complete characterization of the fiscal policy requires the use of identification constraints. In the literature either capital taxes or debt have been restricted to be not contingent on the state of nature. We propose a different type of identification constraints to have both policy variables state-contingent. Three alternative identification conditions are considered: (i) restrictions on the dynamic and stochastic behavior of the debt path; (ii) an exogenous debt path, and (iii) an exogenous belief function. The main result indicates that the optimal capital tax is zero and constant over the business cycle for any of the identification conditions used, suggesting that is optimal for the government to use debt return as a shock absorber, keeping capital taxes constant. The result is quite different from the previous literature, which obtains very volatile capital taxes.

Optimal capital taxation in economies with unionized and competitive labour markets

According to the existing literature, capital taxes should not be imposed in the presence of optimal profit taxation in either unionized or competitive labour markets. We show that this conclusion does not hold for economies with dual labour markets where the competitive wage rate provides the outside option for unionized workers. Even with non-distortionary profit taxation, it is optimal for such economies to tax capital if the revenue share of capital in the unionized sector is lower than in the competitive sector. This is because taxing capital income reduces employment and lowers the outside option of workers in the unionized sector, with the latter employment effect being stronger. A capital subsidy should be granted if the opposite relationship of the revenue shares of capital holds. Copyright 2005, Oxford University Press.

Optimal capital taxation and labor market search

In this paper I study the nature of optimal factor income taxation in a neoclassical growth model where search frictions on the labor marker generate unemployment. I show that the introduction of search frictions changes the Chamley–Judd result of zero capital taxation as follows: if the government is constrained to capital and labor taxation, the optimal capital tax is in general non-zero, but if the government has access to other tax instruments the Chamley–Judd result survives. Quantitatively, the optimal capital tax is small, in the range of −8 to 8 percent. The welfare costs of being constrained can, however, be quite large.

Tax Competition and Asymmetric Countries

This paper explores the consequences of a difference in the levels of public inputs accumulated over time in a small open economy model where capital tax revenues are used exclusively for the provision of public inputs, while the government sets the capital tax rate in way to maximise its country’s national income. It is shown that in this case the optimal capital tax rate in a country is a decreasing function of its stock of accumulated public inputs. The model thus implies that capital tax harmonisation could actually be detrimental to the so-called core EU member states as it could fix their capital tax rates at an in-optimally high levels and thus hinder their ability to dampen undesirable capital out- flows.

Optimal Dynamic Taxation with Indivisible Labour

How should a government arrange taxes on labour and capital over time? To provide an answer, we develop the field of optimal dynamic taxation further by (i) incorporating indivisible labour and (ii) analysing the short‐run dynamics of the capital and labour taxes under the second‐best programme. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. If leisure is normal, the labour tax is gradually increased for a period and then kept constant, and, if leisure is neutral, labour is not taxed at all. Finally, we analyse the dynamics of labour supply under the optimal tax programme.

Optimal Capital Taxation in Economies with Unionised and Competitive Labour Markets

According to the existing literature, capital taxes should not be imposed in the presence of optimal profit taxation in either unionised or competitive labour markets. We show that this conclusion does not hold for an economy with both competitive and unionised sectors, where the competitive wage rate provides the outside option for unionised workers. Even with non-distortionary profit taxation it is optimal for such an economy to tax capital if the revenue share of capital in the unionised sector is lower than the revenue share of capital in the competitive sector. This is because taxing capital income reduces employment and lowers the outside option of workers in the unionised sector with the latter effect being stronger. A capital subsidy should be granted if the opposite relationship in terms of revenue shares holds.

Optimal Taxation of Human Capital and Credit Constraints

We study optimal linear income taxation in a model with heterogeneous agents where earnings potentials are endogenously determined through human capital accumulation. Agents differ in initial conditions and ability to learn. Capital market imperfections prevent poor agents to invest optimally in human capital. We show that optimal linear tax rates on human capital are positive, even in absence of redistributive preferences of the government. A more progressive tax system has efficiency gains because credit constraints are relaxed. Numerical calculations show that optimal linear tax rates are significantly increased when capital market imperfections are present.

The Capital Tax and Welfare Effects from Asymmetric Information on Equity Markets

This paper explores the implications of informational asymmetries between domestic and foreign investors for optimal capital tax rates and welfare. It adopts a model in which asymmetric information implies a home bias in equity. The paper finds that asymmetric information may raise capital tax rates by reducing the marginal cost of taxation. Furthermore, it shows that investors may gain from informational asymmetries. Although asymmetric information increases the uncertainty as perceived by investors, it may also increase tax rates and allow for a higher consumption of public goods. This reflects that asymmetric information may reduce the distortionary effects of competition among governments.

Imperfect Capital Mobility and Local Government Behaviour in a Two‐Period Economy

One clear result in the tax competition literature is that, when head taxes on immobile residents are available, the optimal capital tax rate for local government is zero. However, zero tax rate, when resident taxes are available, is incompatible with the phenomenon actually observed. In most countries, local governments use capital taxes as policy variables for choosing a nonzero tax rate. This paper presents a model of a two‐period economy with imperfect mobile capital to explain the behaviour of local government providing capital subsidies on capital. It further examines an equilibrium tax rate where local government’s objectives include Niskanen‐type revenue‐maximizing.

Optimal taxation of capital income with imperfectly competitive product markets

Abstract We show that the steady-state optimal tax on capital income can be negative, positive, or zero in a neoclassical growth model that allows for imperfectly competitive product markets. The sign of the optimal tax rate depends crucially on (1) the degree of monopoly power, (2) the extent to which monopoly profits can be taxed, (3) the size of the depreciation allowance, and (4) the magnitude of government expenditures. For an empirically plausible set of parameters, we find that the steady-state optimal capital tax can range between −10 and 22%.

Tax competition and tax coordination in an optimum income tax model

The paper uses the self-selection approach of Stiglitz (1982) to study tax competition and tax coordination in a many country–optimum income tax model. In the model, the government can impose a non-linear tax schedule on wage income and a (source-based) tax on mobile capital. In an uncoordinated equilibrium, it turns out that countries can use the capital tax instrument to weaken the self-selection constraint. The paper presents examples where positive and negative capital taxes are optimal from a single country perspective. If the production function is weakly separable between labor and capital, it can be shown that the optimal capital tax is zero. The paper also shows that, contrary to the standard tax competition model, the uncoordinated equilibrium can be efficient. If the wealth distribution (the endowments with capital among individuals), is egalitarian, a coordination of capital taxes does not affect welfare. For non-egalitarian wealth distributions, a coordinated increase in capital taxes can raise or lower welfare depending on the redistributive impact of a higher capital tax.

Transitional Dynamics of Optimal Capital Taxation

A known result holds that capital taxes should be high in the short run and low or zero in the long-run steady state. This paper studies the dynamics of optimal capital taxation during the transition, when a high rate is no longer optimal but the economy is still in flux. The main result is that capital should be taxed whenever the sum of the elasticities of marginal utility with respect to consumption and labor supply are rising and subsidized whenever this sum is falling. If the utility function displays increasing relative risk aversion, this paradoxically implies that capital should be taxed when the capital stock is below the modified golden-rule level and subsidized whenever it exceeds this level. Thus, savings incentives sometimes can be more desirable when the capital stock is large than when it is small.

Quantitative Import Restrictions and Optimal Capital Taxes Under a System of Tax Credits

This paper examines the optimal capital tax policy under quantitative import constraints, and international capital tax credits. For a small capital‐importing country, the optimal capital tax equals the foreign tax under a quota, and equals or exceeds the foreign tax under a VER. For a small capital‐exporting country, the optimal policy towards capital is a zero tax under a quota, and a tax or a subsidy under a VER. Also examined are the welfare effects of capital taxes and trade liberalization, and the joint setting of the two policies, when both instruments are available to the government.

Optimal Capital Taxation and Debt Policy in a Finite-Horizon Macro Model

This article analyzes optimal taxation and debt policies in a model of overlapping generations of finite-lived agents. Taxes are levied proportionately on capital and labor incomes. Tax rates are uniform across all agents. When the social and private discount rates coincide, the optimal steady-state tax rate on capital income is zero. Alternatively, the optimal steady-state tax rate on capital income is positive (or negative), and the optimal steady-state level of government debt is larger (or smaller) whenever the social discount rate is greater (or less) than the private discount rate.

International Capital Competition and Environmental Standards

This paper examines the welfare effects of capital taxation and environmental standards with and without a government spending constraint or international tax credits. This analysis delineates the intricate linkages of the two policy measures to both private income and government welfare. Loosening environmental control leads to more capital tax revenue for the government. The optimal capital tax rate may be of any sign, depending upon the ranking of the weights of government objectives and private utility. The same criterion also applies in determining how stringent the optimal environmental standards should be.