We present a method to analyze the welfare cost of price distortions created by taxes on the incomes of capital and labor and on consumption in an intertemporal model of general equilibrium. This eﬀiciency cost depends in an important way on the production technology. It is not very sensitive to the ratio between the tax rates on capital and labor respectively, when the elasticity of substitution between these factors is small. Our method allows us to determine under the assumptions of the model, the optimal combination of taxes on capital and labor income respectively. The consumption tax is more eﬀicient than the labor income tax.
Chamley, Christophe and Downing, Douglas, "Efficient Stationary Taxation and Intertemporal General Equilibrium" (1981). Cowles Foundation Discussion Papers. 827.