A QUANTITATIVE-ANALYSIS OF CAPITAL INCOME TAXATION

This paper studies the quantitative impact of eliminating capital inco me taxation on capital accumulation and steady-state welfare in a gene ral equilibrium model with overlapping generations of 65-period-lived individuals who face idiosyncratic earnings risk, borrowing constraint s, and life-span uncertainty. Under a wide range of parameter configur ations, the capital income tax rate that maximizes steady-state welfar e is positive, even though eliminating it completely would raise the s teady-state capital stock toward the Golden Rule. This is because the tax burden is shifted toward the younger and liquidity constrained yea rs, reducing the individuals' ability to self-insure.