Following Chamley, Lucas, Laitner, and Aiyagari, this dissertation continues toexplore the answer for the question of zero capital taxation by discussing how taxeson capital income, labor income, and property affect the economy in the contextof a vintage capital model where the embodied technology grows exogenously. Thegovernment maximizes social welfare by finding the optimal combinations of the threetax rates in the steady state and examines the welfare gain/loss over and after thetransitions caused by different types of shocks. The simulation method used here islinear approximation.My results show that in the steady-state economy, given a fixed level of gov-ernment expenditure and a zero property tax rate, the capital-income tax rate thatmaximizes steady-state utility may be negative, zero, or positive depending on thelevel of government expenditure. I also find that, for many values of governmentspending, the highest level of steady-state utility occurs with a subsidy to capitalincome and a tax on labor income. Finally, I find that when taxes on capital income,labor income, and property are available, capital-income taxes are generally the lastresort to finance government expenditures.My results show that in the transitional economy, when tax rates are perma-nently changed and the government expenditure is near zero, the loss of utility overthe transition from no taxes to capital subsidies is too large so the idea itself is notutility-enhancing. Secondly, I find that when the government expenditure is low anda positive technology shock occurs, social welfare in the economy without capital-income taxes may perform better in the early phase of the transition but worse in thelater phase of the transition than that in the economy without property taxes. How-ever, the situation becomes the opposite as government expenditures increase. Inaddition, when one tax is allowed to change, a changing labor-income tax may bringmore utility over the transition than the other two taxes. Finally, when the govern-ment expenditure is unexpectedly reduced, I find that using property taxes ratherthan capital-income taxes stimulates consumption and employment more given ahigher initial level of government expenditure.
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