Journal Article

Optimal Indirect and Capital Taxation

Mikhail Golosov, Narayana Kocherlakota and Aleh Tsyvinski

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 3, pages 569-587
Published in print July 2003 | ISSN: 0034-6527
Published online July 2003 | e-ISSN: 1467-937X | DOI:
Optimal Indirect and Capital Taxation

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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.

Keywords: H21; H25

Journal Article.  8773 words.  Illustrated.

Subjects: Taxation, Subsidies, and Revenue

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