Positive Long Run Capital Taxation: Chamley-Judd Revisited

67 Pages Posted: 2 Sep 2014

See all articles by Ludwig Straub

Ludwig Straub

Massachusetts Institute of Technology (MIT), Department of Economics, Students

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2014

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.

Suggested Citation

Straub, Ludwig and Werning, Ivan, Positive Long Run Capital Taxation: Chamley-Judd Revisited (August 2014). NBER Working Paper No. w20441. Available at SSRN: https://ssrn.com/abstract=2490327

Ludwig Straub (Contact Author)

Massachusetts Institute of Technology (MIT), Department of Economics, Students ( email )

Cambridge, MA
United States

Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-251
Cambridge, MA 02142
United States
617-452-3662 (Phone)
617-253-1330 (Fax)

HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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