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The argument, besides, depends on capitaltaxation being suboptimal.
We find steady-state welfare gains associated with higher rates of capitaltaxation.
When u is small, decreased capitaltaxation decreases the capital stock.
Thus, higher capitaltaxation and lower unskilled labor taxation can result in steady-state increases in welfare across a heterogeneous population.
In optimal capitaltaxation, one must take account of firms' and individuals' ability to avoid and evade capital income taxes.
The relatively low rates of capitaltaxation that we observe in the real world are consistent with the existence of some commitment power.
When technology sufficiently favors skilled workers and capital, the net effect of capitaltaxation can be an increase in the stock of capital.
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