TY  - JOUR
AU  - Judd,Kenneth L.
TI  - The Optimal Tax Rate for Capital Income is Negative
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6004
PY  - 1997
Y2  - April 1997
UR  - http://www.nber.org/papers/w6004
L1  - http://www.nber.org/papers/w6004.pdf
N1  - Author contact info:
Kenneth L. Judd
Hoover Institution
Stanford University
Stanford, CA  94305-6010
Tel: 650/723-5866
Fax: 650/723-1687
E-Mail: kennethjudd@mac.com
AB  - We examine the problem of optimal taxation in a dynamic economy with imperfectly competitive markets.  We find that the optimal tax system will tend to provide subsidies for the purchase of capital goods to offset gaps between price and marginal cost.  The average tax on capital income will be negative, even if pure profits are not taxed away and even if the alternative distortionary taxes have an infinite efficiency cost. These arguments hold even if it is necessary to tax consumption goods which also sell above marginal cost; the difference is that capital goods are intermediate goods and consumption goods are final goods.  Since observed markups are greater for equipment than for construction, this analysis justifies the Investment Tax Credit's discrimination in favor of equipment over structures.
ER  -