This paper provides a new economic interpretation of the well-known dynamic optimal taxation principle that capital income should not be taxed in the steady state. We show that the result is related to the minimization of distortions at the intratemporal margin. When every factor of production can be taxed at the optimal rate, capital income should not be taxed in the steady state. But when there are restrictions on the taxation of production factors, the tax rate on capital income in the steady state is different from zero.
- Capital taxation
- Optimal taxation