Optimal Taxation of Human and Physical Capital in Endogenous Capital Models

35 Pages Posted: 1 Aug 2002 Last revised: 5 Nov 2022

See all articles by Nouriel Roubini

Nouriel Roubini

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Gian Maria Milesi-Ferretti

National Bureau of Economic Research (NBER); Senior Fellow; Centre for Economic Policy Research (CEPR)

Date Written: October 1994

Abstract

This paper studies the effects of human and physical capital income taxation on growth, and examines how these effects depend on the technologies for human capital accumulation and 'leisure'. It then derives the normative implications of the analysis for the optimal taxation of factor incomes. It is shown that in general both capital and labor (human capital) taxes are growth-reducing. In these cases, the optimal long-run tax on both capital and labor income is zero. The optimal taxation plan consists of taxing both factors in the short run, and financing spending in the long run through accumulated budget surpluses.

Suggested Citation

Roubini, Nouriel and Milesi-Ferretti, Gian Maria and Milesi-Ferretti, Gian Maria, Optimal Taxation of Human and Physical Capital in Endogenous Capital Models (October 1994). NBER Working Paper No. w4882, Available at SSRN: https://ssrn.com/abstract=321352

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