Optimal Taxation of Capital Income in Models with Endogenous Fertility

element generates a demand for fertility that depends on financial wealth.
Since the static efficiency condition for fertility enters the implementability
constraint and hence the pseudo-welfare function of the social planner, the
stock of wealth appears directly in the maximand function of the ”Ramsey
problem”, thus altering the Chamley-Judd optimal capital income tax rule
(except for the case of a small open economy adopting a territorial system
of taxation).

Therefore, this theoretical contribution has identified another source of
invalidity of the Chamley-Judd zero capital tax principle. This source of
invalidity does not come from the supply-side — as, for example, occurs in
the cases analyzed by Correia (1996a), and Jones, Manuelli and Rossi (1997)
— but from the demand-side through the effects of fertility on preferences
and the budget constraint of consumers.²²

²² Relatively to a small open economy, it can be curiously noticed that the consideration
of endogenous fertility choices entails a capital tax rate different from zero in the sole case
of a residence-based regime, while the introduction of an additional untaxed input in a
model with an endogenous labor supply alters the result à la Chamley-Judd only when
capital taxation follows a source-based principle (Correia, 1996b).

25

<<   23   24   25   26   27   28   29   >>

More intriguing information