Optimal Capital Taxation with Borrowing Constraints and Entrepreneurial Heterogeneity
Abstract:
This paper analyzes the optimal taxation of capital, labor, wealth and capital income in a model with entrepreneurial heterogeneity and financial frictions as in Itskhoki and Moll (2019). We consider both a closed economy, populated by workers that buy corporate bonds, and a small open economy with hand-to-mou th workers where entrepreneurs finance capital by using their wealth and by borrowing abroad. Taxes are levied to finance unproductive government spen ding. The optimal fiscal policy differs depending on whether we consider th e closed economy or the small open economy. In the former the taxes on labo r and capital should be positive, while the tax on capital income should be zero. The wealth tax levied on workers and entrepreneurs and the pure capi tal tax levied on firms are equivalent fiscal instruments. When we consider a small open economy, we find that the capital tax should be set to zero, but both the capital income tax and the labor tax should be positive. In th is case the capital income tax and the wealth tax are perfect substitutes.< /p> DTSTAMP:20260421T084046Z DTSTART:20250530T130000Z DTEND:20250530T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR