A Quantitative Analysis of Capital Income Taxation

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Abstract
This paper studies the quantitative impact of eliminating capital income taxation on capital accumulation and steady-state welfare in a general equilibrium model with overlapping generations of 65-period-lived individuals who face idiosyncratic earnings risk, borrowing constraints, and life-span uncertainty. Under a wide range of parameter configurations, the capital income tax rate that maximizes steady-state welfare is positive, even though eliminating it completely would raise the steady-state capital stock toward the Golden Rule. This is because the tax burden is shifted toward the younger and liquidity constrained years, reducing the individuals' ability to self-insure.

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