While Mankiw, Weinzierl and Yagan (2009) invoke the Diamond–Mirrlees production efficiency theorem (DMPET) as third intuition for no capital income taxation,[3] their arguments are disputed by Diamond and Saez (2011).
The result can also be interpreted in Corlett–Hague terms: As the horizon grows to infinity, both present and future consumption become equally complementary to leisure as their elasticities become constant; since, according to the Corlett–Hague rule the taxation of commodities should depend on their complementarity to leisure, present and future consumption should be taxed at equal tax rates.
[9] The Chamley–Judd model can also be invoked when arguing that the taxation of existing wealth is superior to the taxation of future capital income due to the tax on current wealth being lump-sum as opposed to the tax on future capital income distorting intertemporal decisions.
This argumentation can be found in the composition of taxation in overlapping generation models, e.g. Auerbach, Kotlikoff and Skinner (1983).
"[14] A number of arguments relating to concerns for efficiency and equity may be found in the literature supporting the taxation of capital income, including (1) Corlett-Hague motives, (2) increases in consumption inequality over the life cycle, (3) heterogeneous preferences, (4) correlation between returns on savings and ability, (5) incomplete or imperfect insurance markets, (6) borrowing or liquidity constraints, (7) human capital distortions, (8) economic rents, and (9) avoidance of arbitrage between capital income and labor income taxation.
Furthermore, Aiyagari (1995) and Chamley (2001) show that capital income taxation is desirable when consumption is positively correlated with savings in a model featuring borrowing-constrained agents with infinite lives and uncertainty.
By increasing the relative price of future consumption and causing the substitution of financial for human savings, capital taxes act as an implicit subsidy for human capital investments at the cost of creating a distortion in financial serving.
However if there are relative income effects or if the degree of inequality aversion if sufficiently high, the optimal marginal labor tax will still be positive.
Apps, Patricia F. and Rees, Ray (2012) argues against the direction of tax reform recommended by the Mirrlees Review, saying that the appropriate direction for tax reform is towards more progressive taxation of both labour earnings and capital income, although not necessarily under the same rate scale.