Why the Optimal Long-Run Tax Rate on Capital is Zero…or Very High: The Missing Explanation

46 Pages Posted: 1 May 2020

See all articles by Chris William Sanchirico

Chris William Sanchirico

University of Pennsylvania Law School; University of Pennsylvania Wharton School - Business Economics and Public Policy Department

Date Written: April 30, 2020

Abstract

Judd’s (1985) finding that the optimal long-run rate of tax on capital is zero—even if equity is an important social objective—has exerted substantial influence in academic and policy circles over the last quarter century. Only very recently has it become clear that Judd’s zero-tax result rests on an implicitly adopted assumption about how savings responds to taxation. Working within the very same model structure, Straub and Werning (2020) demonstrate that the optimal long-term tax rate is positive and potentially large under an alternative equally plausible assumption. This paper attempts to fill a remaining gap in the literature by providing a clear explanation of what is driving results in both variants of Judd’s original model. Furthermore, it suggests that the real logical engine in both cases is an oddity in the mathematical conception of infinity that is of little consequence for actual tax policy.

Keywords: Taxation of Capital, Wealth Tax, Capital Gains, Optimal Long-Run Tax on Capital, Optimal Taxation, Judd model, Straub and Werning variant

JEL Classification: K34, H21, H23

Suggested Citation

Sanchirico, Chris William, Why the Optimal Long-Run Tax Rate on Capital is Zero…or Very High: The Missing Explanation (April 30, 2020). U of Penn, Inst for Law & Econ Research Paper No. 20-33. Available at SSRN: https://ssrn.com/abstract=3589720 or http://dx.doi.org/10.2139/ssrn.3589720

Chris William Sanchirico (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-4220 (Phone)

HOME PAGE: http://www.law.upenn.edu/faculty/csanchir/

University of Pennsylvania Wharton School - Business Economics and Public Policy Department

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
83
Abstract Views
338
rank
321,560
PlumX Metrics