Optimal Fiscal Policy in Overlapping Generations Models

Abstract

In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.

Keywords: Optimal taxation, uniform commodity taxation

JEL Classification: E62, H21