Wednesday, March 3, 2021
Chris Sanchirico (Pennsylvania; Google Scholar) presents Why the Optimal Long-Run Tax Rate on Capital is Zero…or Very High: The Missing Explanation virtually at Oxford's Centre for Business Taxation today:
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 [Redistributive Taxation in a Simple Perfect Foresight Model]. 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 [Positive Long Run Capital Taxation: Chamley-Judd Revisited].
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. A mathematical appendix is available here.