<p><a href="http://www.google.gr/books?hl=en&amp;lr=&amp;id=Xx-j-tYaPQUC&amp;oi=fnd&amp;pg=PR17&amp;dq=Recursive%20macroeconomic%20theory&amp;ots=a0Llkf0iBc&amp;sig=j1OBl0PWIgpW9hTAZwa9WjqcVso&amp;redir_esc=y#v=onepage&amp;q=Recursive%20macroeconomic%20theory&amp;f=false">Ljungqvist and Sargent (2004). Recursive macroeconomic theory 2n ed. </a> (ch. 15) present and review the issue. In the Concluding Remarks section, they mention two environments, where the "zero-optimal-capital tax rate" does not hold:</p>

<p><a href="http://www.jstor.org/stable/2138707">Aiyagari(1995)</a> presents a model with heterogeneous agents, incomplete insurance markets and borrowing constraints (i.e. a "Bewley" model): the optimal capital tax rate is positive, even in the long run. Insight: incomplete markets lead to excessive precautionary saving, leading to over-accumulation of capital. The positive capital tax rate offsets that.  </p>

<p><a href="http://www.jstor.org/stable/3648601">Golosov, Kocherlakota and Tsyvinski (2003)</a> introduce private information (the government cannot observe the hidden skill levels of different households). The tax system becomes an optimal dynamic incentive mechanism, leading to positive optimal capital tax rate.  </p>

<p>Note that the result depends also on the feasibility of government commitment. If a commitment mechanism is not in place, it will be optimal for the government to <em>"renege on its promise and levy a confiscatory tax on capital"</em>, as L &amp; S write. </p>

CC BY-SA 4.0
2024-03-01T18:07:41.220Z
But, if a commitment mechanism is not in place, then why will the government's commitment be credible?
Kwame Brown
CC BY-SA 4.0
2024-03-01T18:36:57.300Z
@KwameBrown As a matter of necessary logical consistency, all things happen for the first time. So imagine an up-to-know credible institution of government that has gained the trust of the citizens, with the consequence that no "commitment mechanism" is in place, since the government has time and again kept its promises. Then, a new bunch of guys comes in power -and we find out that these new guys do not keep their promises.
Alecos Papadopoulos
CC BY-SA 3.0
2014-11-19T03:30:39.447Z
2014-11-19T03:30:39.447Z
Alecos Papadopoulos
<p>There is quite a bit of work being done in that area. One very recent example is Straub and Werning's working paper "<a href="http://www.nber.org/papers/w20441">Positive Long Run Capital Taxation: Chamley-Juff Revisited</a>." 
The point seems to be that we need to consider the rate of convergence to the steady state.</p>

<p>Also, there is other literature that gives some competing results (e.g., "the new dynamic public finance" literature). For a more complete summary of mainstream objections, see Diamond and Saez, "<a href="https://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.165">The Case for a Progressive Tax: From Basic Research to Policy Recommendations</a>," (JEP, 2011). They devote a whole section to why they think the Chamley-Judd result is not policy relevant.</p>

CC BY-SA 3.0
2014-11-19T00:37:37.850Z
You had me at "**JEP**"
Steve S
CC BY-SA 3.0
2014-11-18T23:48:00.303Z
2014-11-18T23:48:00.303Z
jmbejara
<p>The Chamley-Judd result of zero optimal capital taxation says that 0 capital taxation are required in order to maximize welfare at the steady state. </p>

<p>The result is 30 years old. Still assuming that we only care about the steady state, what's the literature's take on that? How esoteric is it? Or in other words, are there simple extensions of the model that completely overcome the result?</p>

<macroeconomics><taxation><welfare-economics><steady-state>
Optimality of Zero Capital Taxation
FooBar
# Optimality of Zero Capital Taxation

(Asked by: username_0 on 2014-11-18)

The Chamley-Judd result of zero optimal capital taxation says that 0 capital taxation are required in order to maximize welfare at the steady state.

The result is 30 years old. Still assuming that we only care about the steady state, what's the literature's take on that? How esoteric is it? Or in other words, are there simple extensions of the model that completely overcome the result?

**Tags:** macroeconomics, taxation, welfare-economics, steady-state


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## 2 answers

### Answer by username_3 on 2014-11-18. Score: 9 | Accepted answer

There is quite a bit of work being done in that area. One very recent example is Straub and Werning's working paper "[Positive Long Run Capital Taxation: Chamley-Juff Revisited](http://www.nber.org/papers/w20441)."
The point seems to be that we need to consider the rate of convergence to the steady state.

Also, there is other literature that gives some competing results (e.g., "the new dynamic public finance" literature). For a more complete summary of mainstream objections, see Diamond and Saez, "[The Case for a Progressive Tax: From Basic Research to Policy Recommendations](https://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.165)," (JEP, 2011). They devote a whole section to why they think the Chamley-Judd result is not policy relevant.

> **Comments:**
> **username_4**: You had me at "**JEP**"  

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### Answer by username_1 on 2014-11-19. Score: 6

[Ljungqvist and Sargent (2004). Recursive macroeconomic theory 2n ed.](http://www.google.gr/books?hl=en&lr=&id=Xx-j-tYaPQUC&oi=fnd&pg=PR17&dq=Recursive%20macroeconomic%20theory&ots=a0Llkf0iBc&sig=j1OBl0PWIgpW9hTAZwa9WjqcVso&redir_esc=y#v=onepage&q=Recursive%20macroeconomic%20theory&f=false)  (ch. 15) present and review the issue. In the Concluding Remarks section, they mention two environments, where the "zero-optimal-capital tax rate" does not hold:

[Aiyagari(1995)](http://www.jstor.org/stable/2138707) presents a model with heterogeneous agents, incomplete insurance markets and borrowing constraints (i.e. a "Bewley" model): the optimal capital tax rate is positive, even in the long run. Insight: incomplete markets lead to excessive precautionary saving, leading to over-accumulation of capital. The positive capital tax rate offsets that.

[Golosov, Kocherlakota and Tsyvinski (2003)](http://www.jstor.org/stable/3648601) introduce private information (the government cannot observe the hidden skill levels of different households). The tax system becomes an optimal dynamic incentive mechanism, leading to positive optimal capital tax rate.

Note that the result depends also on the feasibility of government commitment. If a commitment mechanism is not in place, it will be optimal for the government to *"renege on its promise and levy a confiscatory tax on capital"*, as L & S write.

> **Comments:**
> **username_2**: But, if a commitment mechanism is not in place, then why will the government's commitment be credible?  
> **username_1**: @username_2 As a matter of necessary logical consistency, all things happen for the first time. So imagine an up-to-know credible institution of government that has gained the trust of the citizens, with the consequence that no "commitment mechanism" is in place, since the government has time and again kept its promises. Then, a new bunch of guys comes in power -and we find out that these new guys do not keep their promises.  

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