This study examines optimal taxation in a unionized economy in which households save
capital. The main findings are as follows. Judd’s (1985) and Chamley’s (1986) classical
results of zero taxation on capital income holds. This is true independently of workers’
savings behaviour or the capitalists’ weight in the social welfare function. The steady-state
optimal tax rates on wages and employment are specified. The consumption tax is needed
for revenue raising purposes.
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