Feldstein (1978) employed a simple life-cycle model to argue that a consumption tax would substantially reduce the excess burden of the current system of labor and capital income taxation. This note provides a general characterization of the optimal tax structure for this model. Maintaining Feldstein's other assumptions about parameter values, it is optimal to tax or subsidize capital income according to whether labor supply is an increasing or decreasing function of the wage rate.
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References
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ATKINSONA. B., and STIGLITZJ. E. (1980) Lectures on Public Economies.New York: McGraw-Hill.
2.
FELDSTEINM. (1978) “The welfare cost of capital income taxation.” J. of Pol. Economy86, 2: S29-S51.
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KEELEYM. C. (1981) Labor Supply and Public Policy.New York: Academic Press.
