SUPPLY-SIDE ECONOMICS: AN ANALYTICAL REVIEW

It is proposed that neither capital gains nor capital of any form should be taxed. A model is offered that is suitable for assessing changes in a tax structure consisting of flat-rate taxes on capital and labor income. The model focuses on 3 margins: 1. the division of production between consumption and investment, 2. the division of time between income-directed activities and all other activities, and 3. the division of income-directed time between the production of goods and the accumulation of human capital. Of interest is how each of these margins is affected by changes in the tax structure. The best structure of income taxation - for an economy growing smoothly along a balanced path - is to raise all revenues from the taxation of labor income and none at all from capital.