Optimal Taxation in Infinitely-Lived Agent and Overlapping Generations Models: A Review
FRB Richmond Economic Quarterly, Vol. 87, No. 2, Spring 2001, pp. 23-44
22 Pages Posted: 30 Nov 2012
Date Written: 2001
A survey of the literature on optimal taxation both in infinitely-lived agent models and life-cycle economies suggests that no consensus emerges regarding the optimal tax rate on capital income. Although the tax rate is invariably zero in the long-run steady state of infinitely-lived agent models, this same zero-tax prescription holds for life-cycle economies only under extremely stringent conditions. Both models suggest that capital income should be taxed at non-zero rates during the transition to long-run equilibrium unless individuals have separable preferences between consumption and leisure.
Suggested Citation: Suggested Citation