LAUSR

This paper addresses conflicting results regarding the optimal taxation of capital income. Judd (1985) proves that in steady state there should be no taxation of capital income. Lansing (1999) studies a logarithmic example of one of Judd’s models and finds that the optimal steady state tax on capital income is not always zero. it is positive in some specifications, negative in some others. There appears to be a contradiction. However, I show that Lansing derives his result by relaxing the hypotheses of Judd’s theorem -- with less restrictive hypotheses, a wider range of outcomes is possible. This raises the question of whether yet more outcomes are possible with yet weaker hypotheses. I find that the answer is no: the only possible interior steady states for the model are essentially Judd’s zero capital tax and Lansing’s unitary elasticity of marginal utility.