Optimal taxation and spending in general competitive growth models

We find that the optimal long-run tax on capital income is zero even if the capital stock does not converge to a steady state nor to a steady state growth rate. The optimal tax on human capital is also zero if human capital is not a final good, but the long-run wage tax is not generally zero. We argue that “consumption” tax proposals, such as the Flat Tax, are not consumption taxes, and are biased against human capital.