CYCLICAL AND NONCYCLICAL REDISTRIBUTIVE TAXATION

Consider the optimal time path of a tax on capital income the proceeds of which are transferred to labour in a lump sum. It is known from ea rlier open-loop formulations that, if the optimal rate of tax converge s to a point, it converges to zero, implying that, in the long run, a tax on capital income can do nothing for social welfare. It is now sho wn that the optimal rate of tax need not converge to zero and, in the case of feedback formulations, that it may converge to a positive or n egative number or to a limit cycle.