Optimal Taxation

Economists are not building on a strong shared foundation of understanding.

Optimal tax theory—the branch of public economics that focuses on the design of welfare-maximizing tax systems—has produced two especially stark results regarding the ideal treatment of capital. First, Anthony Atkinson and Joseph Stiglitz concluded in a seminal 1976 article that the optimal capital tax is zero and that all revenue should be raised from taxes on labor income. Four years later, Stanley Fischer analyzed a model similar to Atkinson and Stiglitz’s and concluded that the welfare-maximizing system would tax only capital—not labor—and would potentially tax capital at a rate as high as 100 percent.

From the Tax Profs Blog.