December 2015

IZA DP No. 9607: Capital Income Taxation and Household Production

Patricia Apps, Ray Rees

The Atkinson-Stiglitz Theorem and its extensions have been interpreted as implying that capital income should not be taxed. If, as seems reasonable on empirical grounds, we introduce production of household goods with close market substitutes, this conclusion no longer holds. We analyse optimal capital income taxation for this case.