Optimal Flat-Rate Taxes on Capital--A Re-examination of Lucas' Supply Side Model.

We examine the transitional dynamics of Lucas' supply side model of the US economy in order to specify the effects of capital taxation on economic growth and welfare. We restrict the analysis to policy plans characterized by constant capital taxes and require the government to maintain a balanced budget. Under these restrictions, the optimal tax rate on capital is shown to be positive and sensitive to the government expenditure rule. Welfare can be further increased by the introduction of a tax on asset holdings. Copyright 2000 by Oxford University Press.