TY  - JOUR
AU  - Jones,Larry E.
AU  - Manuelli,Rodolfo E.
AU  - Rossi,Peter E.
TI  - On the Optimal Taxation of Capital Income
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4525
PY  - 1993
Y2  - November 1993
UR  - http://www.nber.org/papers/w4525
L1  - http://www.nber.org/papers/w4525.pdf
N1  - Author contact info:
Larry E. Jones
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 Fourth Street South
Minneapolis, MN 55455
Tel: 612/624-4553
Fax: 612/624-0209
E-Mail: lej@umn.edu

Rodolfo Manuelli
Department of Economics
Washington University in St. Louis
Campus Box 1208;
St. Louis MO 63130-4899
Tel: 608/263-3877
Fax: 608/262-2033;608/263-3876
E-Mail: manuelli@artsci.wustl.edu
AB  - One of the best known results in modern public finance is the Chamley-Judd result showing that the optimal tax rate on capital income is zero in the long-run.  In this paper, we reexamine this result by analyzing a series of generalizations of the Chamley-Judd formulation.  We show that in a model with human capital, if the tax code is sufficiently rich and there are no pure profits from accumulating human capital, then all distorting taxes are zero in the long-run under the optimal plan.  In this sense, income from physical capital is not special.  To gain a better understanding of these two conditions, we study examples in which they are not satisfied and show that the optimal tax rate on income from physical capital does not go to zero. In those cases where the limiting tax rate is non-zero, we calculate its value for alternative specifications of the marginal welfare cost of taxation.  Our results indicate that even for conservative specifications, tax rates of 10% and higher are possible under the optimal code.
ER  -