Dear Max, In the past I would have discussed this in terms of long run equililbria but nowadays I am unsure that any long run arguments are worth a pinch of salt. Structural change is happening so fast with modern technology that the concept that the economy will tend to move towards some notional long run equilibria appears totally redundant now. So instead, I would look at this in terms of taxation efficiency. In the this vein, I recommend income taxes rather than the GST/VAT as they are so much more efficient to collect and have a positive welfare effect hopefully reducing inequality. The problem 15-20 years ago was the argument that incomes can be hidden leading to much taxation avoidance (let alone evasion) while the GST/VAT was not so strongly affected (though some would diagree with this claim). Nowadays the Australian Taxaton Office claims that this argument against income tax is now quite false and they have a much stronger knowledge now of people's incomes, though there are some problems with people working for multi nationals etc. 

One issue in Australia is capital gains tax and the multitude of allowances that the current law provides, the main one being 50% of gains free of tax. This has provided a way in which the more wealthy can earn huge sums with only a 22.5% marginal tax rate (half of 45%). This is only increasing inequality. There is currently a policy debate about removing these tax advantages and I feel the perks should be removed as soon as possible. 

One of the main advantages of capital gains taxation is that it applies when the asset is sold and the relevant transactions are mostly very visible by the tax office and so hard to hide. The gains have to be fairly substantial to be taxed and so in the end this is a very efficient and effective form of taxation as far as the tax office is concerned.

Then there is the vexed question of do you tax capital when there are no gains. These is a degree of public concern about this especially in the case of farms where a child inherits the farm in the UK. Inheritance tax can force the sale of the farm at least in part. In Australia there is no inheritance tax. One should remember that inheritance tax is still a tax on a gain in wealth for the inheritance receiver.

But, if there is no gain, and someone is just sitting on a very valuable asset. Should they be taxed on the asset as well as the income earned from the asset. Wealth nearly always leads to more wealth and power and so on welfare grounds I feel it should be taxed. This is a purely political argument for the reduction of inequality. 

However some might argue that when people own great wealth, that wealth is employed very inefficiently. Take the opposite extreme where you provide a sewing meachine to a very poor person, possibly in South Asia. They tend to use that "capital" extremely efficiently. There is something here worth looking at but as you see from all the above, I am not very conversant with the literature these days.

So I just hope my random thoughts are of a little use to you. I do not claim to be any form of expert in this field though I havae studied Australian taxation and Inequality.

The other rason for writing to you is that I see you are fromthe Potsdam Institute for Climate Impact Research. Although I am currently working on executive remuneration and corporate governance, my real passion now is climate change policy. What I am looking for is some very good detailed analyses of the various country offerings for the 2015 Paris negotiations. If you have any advice on the best places to look for such analyses, please let me know. All the best, Colin

Here is a short history of economics view on the matter:

The Physiocrats believed that taxes should be only on land, since agriculture was the only source of a net product. Other taxes will eventually fall on land. For example, because wage was at the subsistence level, taxing labor would shift the burden to land. The idea of land tax only was supported by James and John Mill, and Henry George.

Adam smith perceived that capital supports the productivity of labor and accumulation. Tax on capital should therefore, be minimal and can be so by keeping the size of the government small.

As Malthus put it: “many of the taxes which fall on the capital of the farmer and the wages of the labourer, as well as those directly imposed on themselves, they must necessarily feel it in the diminution of that portion of the whole produce, which under other circumstances would have fallen to their share.” (Principles)

Stanley Jevons wrote: “We must regard labour, land, knowledge, and capital as conjoint conditions of the whole produce, not as causes each of a certain portion of the produce. Thus in an elementary state of society, when each labourer owns all the three or four requisites of production, there would really be no such thing as wages, rent, or interest at all. Distribution does not arise even in idea, and the produce is simply the aggregate effect of the aggregate conditions. It is only when separate owners of the elements of production join their properties, and traffic with each other, that distribution begins, and then it is entirely subject to the principles of value and the laws of supply and demand.” (Principles)

Now, at the modern textbook level, we speak of a desired level of capital, which decreases with the rental cost of capital and increases with the level of output/income in the future when the capital is employed. The future time may be short as a week or long as many years, so a permanent measure of income is desirable. Note that corporate taxes and investment tax credit enter on the rental cost side. The former tends to lower the desired rate of capital. This in turn will slow the growth of investment as the gap between actual and desired capital via the flexible accelerator will be narrowed. This might lower capital share in output, but lower output growth as well say via the Keynesian multiplier.

I think that probably this is the best reference and discussion about capital taxation:

"A Theory of Optimal Inheritance Taxation", E. Saez and T. Piketty, Econometrica 81(5), 2013, 1851-1886.

A longer, more detailed version is this:

"A Theory of Optimal Capital Taxation", NBER Working Paper No. 17989, April 2012)

Thank you, Claudio. My reading of Piketty and Saez (2013) is that they do not disaggregate wealth, but rather equate it with capital. In a recent series of working papers, Stiglitz shows that this simplifying assumption leads to conclusions which are inconsistent with the observed increase in wealth inequality.