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TAXING CAPITAL INCOME AS PIGOUVIAN CORRECTION: THE ROLE OF DISCOUNTING THE FUTURE

Published online by Cambridge University Press:  25 October 2005

VALERIA DE BONIS  and
LUCA SPATARO
VALERIA DE BONIS
Affiliation:
Università di Pisa
LUCA SPATARO
Affiliation:
Università di Pisa
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Abstract

In this work, we find that the zero capital income tax result might not hold, even at the steady state, when the government discount rate differs from the individual one. As intuitive Pigouvian considerations would suggest, capital income should be taxed (subsidized) when the government is less (more) impatient than individuals are. However, a counterintuitive asymmetry emerges as for the steady state since, in the long run, capital income cannot be taxed because of the explosive distortionary effect of positive taxes. The asymmetry is ruled out with a logarithmic utility function because, in this case, the anticipated policy path does not affect current individual choices and thus the cumulative distortionary effect of taxes disappears.

Keywords

Dynamic Optimal TaxationRamsey ProblemPrimal ApproachContinuous Time
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 9 , Issue 4 , September 2005 , pp. 469 - 477
Copyright
© 2005 Cambridge University Press

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