Taxation of Capital–Capital Levies and Commitment

Chamley and Judd argued that optimal taxation dictates zero long-run taxes on capital income, but Straub and Werning found that these taxes may be positive in the steady state.

Chamley and Judd argued that optimal taxation dictates zero long-run taxes on capital income, but Straub and Werning found that these taxes may be positive in the steady state. These models feature a ‘period-zero problem’ because the Ramsey formulation omits past commitments but includes future ones. Chari, Nicolini, and Teles (2020) add commitments to the representative household’s wealth in utility units. Then a nonzero capital levy may apply in period 1, future tax rates on asset income equal zero, and tax rates on consumption are constant. Time-consistency fails if future policymakers are unconstrained but holds if wealth commitments in each period are strict enough to motivate each policymaker to choose zero capital levies. Then a timeless perspective applies where period 1 is not special, tax rates on asset income are always zero, and tax rates on consumption are constant. In the neoclassical growth model with utility depending on the log of consumption, the level of the wealth commitment is constant in the steady state. Extensions allow for uncertainty and heterogeneity and for a form of partial commitment.