Optimal Positive Capital Taxes at Interior Steady States

Abstract

We generalize recent results of Bassetto and Benhabib (2006) and Straub and Werning (2019) in a neoclassical model with endogenous labor-leisure choice where all agents are allowed to save and accumulate capital. We provide a sufficient condition under which optimal redistributive capital taxes remain at their allowed upper bound forever, even if the resulting equilibrium trajectory converges to a unique steady state with positive and finite consumption, capital, and labor. We then provide an interpretation of our sufficient condition. Using recent evidence on wealth distribution in the United States, we argue that our sufficient condition is empirically plausible. (JEL D31, E21, H21, H23, H25, J22)