Optimal Capital Income Taxation and Redistribution

This paper studies the effects of agent heterogeneity on optimal capital income taxation. We discuss conditions for the optimality of zero capital income taxes in a multiperiod model with heterogeneous agents and explicitly derive the welfare effects of taxation depending on the distribution of the agents' characteristics. In particular, we show that the sign of the optimal capital income tax rate does not depend on the extent of inequality in goods endowments and productivities each by itself, but on a measure of inequality in their joint distribution.