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Optimal Indirect and Capital Taxation

Working Paper 615 | Published June 1, 2001

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Optimal Indirect and Capital Taxation


In this paper, we consider an environment in which agents’ productivities are private information, 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 _The Review of Economic Studies_ (Vol. 70, Iss. 3, July 2003, pp. 569–587),