Optimal Fiscal Policy in Overlapping Generations Models

In this article, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is nonzero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure