Taxing capital along the transition-Not a bad idea after all?

We show that the optimality of a high capital income tax rate along the transition crucially depends on the assumption of a utilitarian social welfare function. This objective of the policy maker comprises implicit redistributive objectives across and within cohorts. Based on pure economic efficiency and insurance effects, however, we find a zero capital income tax rate and a less progressive labor income tax schedule to be optimal. Such a tax system receives political support from initial cohorts. A high capital income tax regime on the other hand does not.