On the Optimality of Differential Asset Taxation

74 Pages Posted: 30 Aug 2019 Last revised: 5 Feb 2025

See all articles by Thomas Phelan

Thomas Phelan

Federal Reserve Bank of Cleveland

Date Written: February 04, 2025

Abstract

In this paper I study the optimality of differential asset taxation in an environment with entrepreneurs and workers in which output is stochastic and entrepreneurs can misreport profits and abscond with capital. I show that a stationary efficient allocation may be implemented as an equilibrium with endogenous collateral constraints, transfers to newborns, and linear taxes on profits, investment, and interest. Further, these taxes differ from one another and serve distinct purposes. The profits tax shares risk and depends solely on the severity of the misreporting friction, while the remaining instruments determine the efficient mean and variance of entrepreneurs' consumption growth.

Keywords: optimal taxation, moral hazard, optimal contracting

JEL Classification: D61, D63, E62

Suggested Citation

Phelan, Thomas, On the Optimality of Differential Asset Taxation (February 04, 2025). FRB of Cleveland Working Paper No. 19-17R2, https://doi.org/10.26509/frbc-wp-201917r2, Available at SSRN: https://ssrn.com/abstract=3445140 or http://dx.doi.org/10.2139/ssrn.3445140

Thomas Phelan (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://https://www.clevelandfed.org/our-research/economists/tom-phelan.aspx

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