University of Helsinki
Abstract: In this document, optimal factor taxation is examined when output is produced from labor and capital and some (or all) households save in capital. Main results are as follows. There is a reputational equilibrium where the government has no incentive to change its announced tax policies. In that equilibrium, the assertion of zero capital taxation holds, independently of the wage earners’ savings behavior and their weight in the social welfare function. A specific elasticity rule is derived for the optimal wage tax. Finally, it is shown how fertility and mortality can be introduced as endogenous variables in the model.
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