Working Paper: NBER ID: w20441
Authors: Ludwig Straub; Iván Werning
Abstract: According to the Chamley-Judd result, capital should not be taxed in the long run. In this paper, we overturn this conclusion, showing that it does not follow from the very models used to derive them. For the model in Judd (1985), we prove that the long run tax on capital is positive and significant, whenever the intertemporal elasticity of substitution is below one. For higher elasticities, the tax converges to zero but may do so at a slow rate, after centuries of high capital taxation. The model in Chamley (1986) imposes an upper bound on capital taxation and we prove that the tax rate may end up at this bound indefinitely. When, instead, the bounds do not bind forever, the long run tax is indeed zero; however, when preferences are recursive but non-additive across time, the zero-capital-tax limit comes accompanied by zero private wealth (zero tax base) or by zero labor taxes (first best). Finally, we explain why the equivalence of a positive capital tax with ever rising consumption taxes does not provide a firm rationale against capital taxation.
Keywords: Capital Taxation; Intertemporal Elasticity of Substitution; Optimal Tax Theory
JEL Codes: H21; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower IES (L00) | higher capital taxes (F38) |
| higher IES (I24) | lower capital taxes (F38) |
| structure of preferences (D11) | viability of capital taxation (F38) |
| infinitely-lived agents (D15) | sensitivity of results (C52) |