5 Concludingremarks
This paper has investigated the question of optimal factor income taxation
in intertemporal optimizing models of wealth formation with endogenous
population growth. The analysis has considered infinitely-lived closed and
small open economies.
The consideration of elastic fertility choices may invalidate the Chamley-
Judd normative prescription of a zero capital income tax rate found in a
neoclassical growth model with endogenous labor-leisure choices. In fact, in a
closed economy as well as in a small open economy operating under a perfectly
integrated capital market and adopting a regime of residence-based wealth
taxation, welfare maximization implies that income from capital should be
subsidized. If instead a small open economy that adopts a source-based
regime of taxation is taken into account, capital income should be exempted
from taxation.
Also the Abel (2006) proposal of accompanying capital taxation with the
exemption of gross investment from taxable income has been investigated
under the hypothesis of endogenous population growth. Our results depart,
once again, from those obtained in models with an elastic labor supply. We
discover that the first-best allocation can be replicated by adopting wealth
income taxation (that incorporates saving exemption) coupled with labor
income subsidization. This is valid for a closed economy and a small open
economy adopting a system of worldwide taxation.
Our general findings are quite surprising as infinitely-lived models with
endogenous fertility are similar to the corresponding models incorporating en-
dogenous labor-leisure choices. In particular, the similarity between the two
setups is due to the apparently parallel role of fertility and leisure: Fertility
is at the same time a good as well as indirectly an input, like leisure. Differ-
ently from leisure, fertility enters the consumers’ budget constraint not only
through the time allocation constraint, but also through a nonlinear term
(given by the population growth rate times the capital intensity) that re-
flects the reduction in the capital-labor ratio due to population growth. This
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