NORMATIVE ASPECTS OF DIFFERENTIAL, STATE-CONTINGENT CAPITAL INCOME TAXATION

The paper studies optimal taxation in a two-period, two-asset model in which the assets have random returns. The taxes are state-contingent, proportional taxes on the asset-returns. Government revenue requirements in each state of nature are given. Consumers are identical. Two results are found. It is shown that the optimum has a degree of freedom, so that there is a set of equivalent optimal tax systems. And conditions are established for the optimum to have no portfolio distortion, in the sense that there is no tax inducement to switch from one asset to the other.