Larry Summers: evaluation

Transcript context

…Here’s a real softball question. What’s the optimal rate of tax on capital income? [laughter] Closer to the tax rate on other income than to zero would be my answer to that. A fair amount of capital income reflects rents of one kind or another. Capital income is substantially held by those at the high end. There’s a fair amount of what’s really capital income in the form of unrealized capital gains that never gets taxed. So I think the right aggregate capital income tax rate is closer to what would go with a comprehensive income tax than it is to the alternative idea that capital income taxation is just a way of taxing future consumption, and therefore you should tax future consumption and present consumption at the same rate and the tax rate should be zero. If we think about the 1980s, there are a lot of models from that time — some coming from your research — where you have an infinite horizon model with a zero tax rate on capital income. At some point, enough capital accumulates so that even wages are higher. And there’s a steady-state long-run argument that still the number should be zero. What has changed that makes those models less applicable? Is it that we think the elasticity is different, or is it some other variable? What’s changed in our knowledge or your understanding?…

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