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American Economic Review: Vol. 99 No. 1 (March 2009)
AER Volume. 99, Issue 1 | 
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Taxing Capital? Not a Bad Idea after All!
Article Citation
Conesa, Juan Carlos,
Sagiri Kitao, and
Dirk Krueger. 2009. "Taxing Capital? Not a Bad Idea after All!."
American Economic Review,
99(1): 25-48.
DOI: 10.1257/aer.99.1.25
DOI: 10.1257/aer.99.1.25
Abstract
We quantitatively characterize the optimal capital and labor income tax in an
overlapping generations model with idiosyncratic, uninsurable income shocks
and permanent productivity differences of households. The optimal capital
income tax rate is significantly positive at 36 percent. The optimal progressive
labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200
(relative to average household income of $42,000). The high optimal capital
income tax is mainly driven by the life-cycle structure of the model, whereas the
optimal progressivity of the labor income tax is attributable to the insurance
and redistribution role of the tax system. (JEL E13, H21, H24, H25)
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Authors
Conesa, Juan Carlos (U Autonoma de Barcelona)
Kitao, Sagiri (U Southern CA)
Krueger, Dirk (U PA)
Kitao, Sagiri (U Southern CA)
Krueger, Dirk (U PA)
JEL Classifications
E13: General Aggregative Models: Neoclassical
H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H21: Taxation and Subsidies: Efficiency; Optimal Taxation
H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H25: Business Taxes and Subsidies including sales and value-added (VAT)
