Skill‐Biased Technological Changes, Nonseparable Utility, and Dynamic Optimal Capital Tax

ABSTRACT This paper examines the optimal dynamic taxation of capital in the context of skill‐biased technological change. The study reveals that the widening wage gap, coupled with the complementarity between consumption and leisure, provides a novel rationale for capital taxation. We demonstrate that taxing capital is beneficial in economies experiencing persistent skill‐biased technological advancements, even if the capital is skill‐neutral and the complementarity between consumption and leisure is time invariant. Converse results appear when leisure substitutes for consumption. Statistics‐based optimal tax formulas are provided to show how the government can dynamically mitigate the impacts of various technological changes through the utilization of labor and capital income taxes.