Department of Economics and Business Economics

Taxation of capital income in overlapping generations economies

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Whether capital income should be taxed in overlapping generations economies is vividly discussed. It is shown that intergenerational lump-sum taxes cannot implement the Golden Rule allocation when agents have private information on their earnings potential. Hence, the seminal Atkinson–Stiglitz result that optimal income taxation pre-empts any role for indirect taxation cannot be interpreted to imply that capital income taxation (affecting intertemporal relative prices) should not be taxed. Specifically, capital income should unambiguously be taxed in small open economies, and the optimal tax rate depends inversely on the elasticity of total savings to disposable income and the after-tax rate of return.

Original languageEnglish
JournalJournal of Public Economic Theory
Pages (from-to)1245-1261
Number of pages17
Publication statusPublished - 2020

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