Optimal taxation and endogenous growth

This paper analyzes redistributive optimal capital and labor income taxation in endogenous growth models with heterogeneous agents. The government faces a dynamic equity-efficiency trade-off between redistribution, static distortions, and growth effects. Positive capital income taxation can be optimal, and the redistributive component of the optimal capital income tax is always positive. With optimal capital income taxation, the optimal marginal labor income tax rates are systematically lower than their static values. My results apply in the AK growth model and in a reduced-form endogenous growth framework that nests models of growth via expanding varieties and Schumpterian growth models.