Dynamic Optimal Taxation with Human Capital

1 This paper revisits the dynamic optimal taxation results of Jones, Manuelli, and Rossi (1993, 1997). They use a growth model with human capital and \u85nd that optimal taxes on both capital income and labor income converge to zero in steady state. For one of the models under consideration, I show that the representative households problem does not have an interior solution. This raises concerns since these corners are inconsistent with aggregate data. Interiority is restored if preferences are modi\u85ed so that human capital augments the marginal utility of leisure. With this change, the optimal tax problem is analyzed and, reassuringly, the Jones, Manuelli, and Rossi results are con\u85rmed: neither capital income nor labor income should be taxed in steady state. JEL Classi\u85cation: H2