Optimal Taxation in the Automated Era

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We find that the optimal capital income tax rate lies between 22 percent and 23 percent under realistic technology shocks, while the tax rate could be higher if the elasticity of substitution between automation-related capital and unskilled workers becomes greater. Another finding is that the optimal labor income tax rate for unskilled workers is lower than that for skilled workers, although the social welfare gain from such optimal labor income tax reform is very small. We also find that the optimal tax rate on automation-related capital is zero due to its large economic distortion in the long run. Furthermore, the redistributive mechanism of the optimal consumption tax depends on the elasticity of substitution between automation-related capital and unskilled workers. Finally, we find that Pareto-efficient optimal tax reform is a combination of raising the capital income tax rate and lowering the consumption tax rate from the status quo. When automation-augmented technological progress is rapid, it is even optimal to rely solely on the capital income tax rate hike as a redistributive tax policy tool.

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