Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation

Abstract

In this paper, I consider a dynamic economy in which a government needs to finance a stochastic process of purchases. The agents in the economy are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. I construct an optimal tax system that is restricted to be linear in an agent’s wealth but can be arbitrarily nonlinear in his current and past labor incomes. I find that wealth taxes in a given period depend on the individual’s labor income in that period and previous ones. However, in any period, the expectation of an agent’s wealth tax rate rate in the following period is zero. As well, the government never collects any net revenue from wealth taxes. ∗This version fixes some typos in the December 2003 version. The material in this paper previously circulated as

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