Yet Another Reason to Tax Goods

Golosov et al. (2003) have extended Atkinson and Stiglitz's uniform tax prescription to a dynamic Mirrlees' (1971) economy under the assumption that the government fully controls the agent's savings. When savings are not controlled by the government we show that the result is no longer valid: separability is not sufficient to guarantee that uniform taxes are optimal. If, beyond being separable, preferences over consumption bundles are quasi-homothetic, constrained efficiency of uniform taxes is restored. We also show that optimal taxes on the returns of capital are, in general, different from zero. (Copyright: Elsevier)