Optimal Tax Policy

Greg Mankiw

A group of top economists was asked what they thought about this statement:

“Taxing capital income at a permanently lower rate than labor income would result in higher average long-term prosperity, relative to an alternative that generated the same amount of tax revenue by permanently taxing capital and labor income at equal rates instead.”

There was not unanimity, but about three times as many economists agreed than disagreed.

1 thought on “Optimal Tax Policy

  1. Perhaps it should depend on the type of capital income.

    Capital income resulting from buying existing stock does not result in more investment. On the other hand, capital income resulting from buying new stock issues does result in more investment which could boost the economy. Thus, it may be that capital income should be taxed at the same rate as labor income unless it is from new investment.

    Usually changing laws and regulations results in unintended consequences, so before implementing this change, there should be considerable analysis and discussion.

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