Working Paper: NBER ID: w23892
Authors: Joseph E. Stiglitz
Abstract: This paper shows that there is a presumption that Pareto efficient taxation entails a positive tax on capital. When tax and expenditure policies can affect the market distribution of income in ways that cannot be directly offset, those effects need to be taken into account, reducing the burden imposed on distortionary redistribution. The paper extends the 1976 Atkinson-Stiglitz results to a dynamic, overlapping generations model, correcting a misreading of the result on the desirability of a zero capital tax. That result required separability of consumption from labor and that the only unobservable differences among individuals were in (fixed) labor productivities. In a general equilibrium model, one needs to take into account the effects of policy changes on binding self-selection constraints. In a simple model with time separability but with non-separability between consumption and leisure, capital taxation depends on the complementarity/substitutability of leisure during work with retirement consumption.\nThe final section constructs a simple two class model, capitalists who maximize dynastic welfare and workers who save for retirement, whose productivity can be enhanced by (publicly provided) education. It derives a simple expression for the optimal capital tax, which is positive, so long as the social welfare function is sufficiently equalitarian and the productivity of educational expenditures are sufficiently high.
Keywords: No keywords provided
JEL Codes: E2; H2; H41; H52; I24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pareto efficient taxation (H21) | positive tax on capital (F38) |
| tax and expenditure policies (H29) | income distribution (D31) |
| differences in inherited capital (D29) | necessity of capital taxation (F38) |
| social welfare function is sufficiently equalitarian (D63) | optimal capital tax is positive (H21) |
| productivity of educational expenditures is high (I26) | optimal capital tax is positive (H21) |
| self-selection constraints (D10) | optimal tax structure (H21) |
| relative wages influenced by consumption levels (F62) | indirect taxation on high-skilled individuals (H29) |
| non-separability between consumption and leisure (D10) | capital taxation should be guided by consumption-leisure relationship (H31) |