ATheoryof(Fair)CapitalTaxation-écoleNormaleSupérieure.docVIP

A Theory of Optimal Capital Taxation Thomas Piketty, Paris School of Economics Emmanuel Saez, UC Berkeley May 17th, 2011 ROUGH DRAFT - TO BE COMPLETED - NOT FOR CIRCULATION Abstract: This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. 1. Introduction Economists have a problem with capital taxation. According to the profession’s most popular theoretical models, socially optimal tax rates on capital should be equal to τK=0% in the long run - including from the viewpoint of those agents and dynasties who own no capital at all. This is a very strong result indeed, especially since it applies to all forms of capital taxation, either on the capital stock or on the capital income flow, and either at the time of wealth transmission or during ones lifetime. That is, if we were to take this result seriously, then we should be pushing for a 0% inheritance tax rate, a 0% property tax rate, a 0% corporate profit tax rate, a 0% interest and dividend income tax rate, etc., and transfer the resulting revenue loss onto increased tax rates on labor income and/or consumption. Very few economists however seem to endorse such a radical policy agenda. Presumably this reflects a lack of faith in the profession’s most popular models. This is in our view one of the most important failures of modern economics. The objective of this paper is to develop a realistic, tractable normative theory of socially optimal capital taxation. By realistic, we mean a theory providing normative conclusions that are not fully off-the-mark with respect to the real world (i.e. positive and significant capital tax rates). By realistic, we also mean a theory offering such conclusions for reasons that are consistent with the reasons which - we feel - are at play in the real world. By tractable, we mean that one can put numbers into optimal tax formulas and quantify the various trade-offs in a simple and plausible way. In our view,