Optimal capital income taxation under capital-skill complementarity

Official URL: http://risc01.sabanciuniv.edu/record=b1669273 (Table of Contents)

This paper analyses the impact of capital-skill complementarity on optimal capital income taxation problem for a redistributive government. We compare an infinite horizon heterogeneous agents incomplete market model in which the technology exhibits capital-skill complementarity to a model in which we keep all the properties of the former but eliminate capital-skill complementarity. We find that under capital-skill complementarity the optimal tax rate on capital income is 0.71, whereas it is 0.24 for the no complementarity case. The former is significantly higher due to extra redistributive channel that results from the relation between capital accumulation and skill premium.