Optimal Capital Taxation and Debt Policy in a Finite-Horizon Macro Model

Abstract

This article analyzes optimal taxation and debt policies in a model of overlapping generations of finite-lived agents. Taxes are levied proportionately on capital and labor incomes. Tax rates are uniform across all agents. When the social and private discount rates coincide, the optimal steady-state tax rate on capital income is zero. Alternatively, the optimal steady-state tax rate on capital income is positive (or negative), and the optimal steady-state level of government debt is larger (or smaller) whenever the social discount rate is greater (or less) than the private discount rate.