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| Author: | Aiyagari, S. |
| Title: | Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting |
| Journal: | Journal of Political Economy
1995 : DEC, VOL. 103:6, p. 1158-1175 |
| Index terms: | POLITICAL ECONOMY CAPITAL INCOME TAX INCOMPLETE MARKETS |
| Language: | eng |
| Abstract: | For a wide class of infinitely lived agent models, Chamely has shown that the optimal capital income tax rate is zero in the long run. Lucas has argued that for the US economy, there is a significant welfare gain from switching to this policy. This paper shows that for the Bewley class of models with incomplete insurance markets and borrowing constraints, the optimal tax rate on capital income is positive, even in the long run. Therefore, cutting the capital income tax to zero may well lead to welfare losses. |
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