In this paper, we consider an environment in which agents’ skills are private information, are potentially multi-dimensional, and follow arbitrary stochastic processes. We allow for arbitrary incentive-compatible and physically feasible tax schemes. We prove that it is typically Pareto optimal to have positive capital taxes. As well, we prove that in any given period, it is Pareto optimal to tax consumption goods at a uniform rate.
Published in: _Review of Economic Studies_ (Vol. 70, No. 3, July 2003, pp. 569-587) https://doi.org/10.1111/1467-937X.00256.