OPTIMAL STATE-CONTINGENT CAPITAL TAXATION - WHEN IS THERE AN INDETERMINACY

Several recent papers on dynamically optimal taxation have derived indeterminacy results regarding state-contingent capital taxation in stochastic equilibrium models with state-contingent government debt. I show that these results rely crucially on the assumption that there is a single, aggregate decision about private capital investment. In a model with many technologies and many capital goods, the need to preserve individual investment incentives imposes as many constraints on government policy as they are inter-temporal investment decisions. The structure of capital tax rates and the structure of government debt are both restricted in many dimensions.