Optimal taxation in infinitely-lived agent and overlapping generations models: a review

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Description/Abstract

A survey of the literature on optimal taxation both in infinitely-lived agent models and life-cycle economies suggests that no consensus emerges regarding the optimal tax rate on capital income. Although the tax rate is invariably zero in the long-run steady state of infinitely-lived agent models, this same zero-tax prescription holds for life-cycle economies only under extremely stringent conditions. Both models suggest that capital income should be taxed at non-zero rates during the transition to long-run equilibrium unless individuals have separable preferences between consumption and leisure.