Intangible Capital and Ramsey Capital Taxation (updated)

• BSE Working Paper: 109802 | September 15

The standard analysis of optimal fiscal policy in the neoclassical growth model, e.g. Chamley (1986) and Judd (1985), aggregates different types of assets into a unique capital good and all sorts of capital taxes into a unique capital tax. There, the optimal capital tax rate is very high in the short-run and zero in the long-run and, inevitably, time-inconsistent. This paper shows that this classic result does not hold in a more disaggregated framework. As proposed in McGrattan and Prescott (2005), we consider an economy with corporate and dividend taxes, where firms invest in both tangible and intangible assets. If corporate taxes are high, firms can avoid current taxation by investing in intangible assets that can be expensed. If dividend taxes are temporarily high, firms can defer dividend payments. We show that the Ramsey plan is characterized by zero corporate taxes every period (including the initial one) and constant dividend tax rates, so the Ramsey capital taxation is time-consistent.