Redistribution with Unobservable Bequests: A Case for Taxing Capital Income
Queen's University; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)
Catholic University of Louvain - Department of Economics (Deceased)
University of Liege - Research Center on Public and Population Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
The Scandinavian Journal of Economics, Vol. 102, Issue 2, June 2000
This paper addresses the question of the optimal taxation of labour and interest income in an overlapping generations model with two unobservable characteristics, ability and inheritance. We assume realistically that saving can only be taxed anonymously, whereas the tax on labour earnings can be individualized and made non-linear. In such a setting, we show that a withholding tax on interest income along with a non-linear tax on labour income is desirable. The role of interest income taxation is to indirectly tax inherited wealth.
JEL Classification: D63, H2Accepted Paper Series
Date posted: November 27, 2000
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