Economics, Econometrics and Finance
4 years ago

New Study Reveals Optimal Tax System for Maximum Revenue Collection

National Bureau of Economic Research
Optimal Capital Income Taxation
Andrew B. Abel

Paper Summary

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The optimal tax system for funding government purchases involves taxing labor income instead of capital in the long run. By allowing deductions for capital expenditures, a constant tax rate on capital income can be non-distortionary. This means that even with a zero effective tax rate on capital, the capital income tax can still generate significant revenue. As long as government purchases do not exceed gross capital income minus gross investment, the best tax system will include a tax on capital income and no tax on labor income.