Redistribution and Insurance with Simple Tax Instruments

37 Pages Posted: 22 Jun 2015

See all articles by Sebastian Findeisen

Sebastian Findeisen

University of Zurich; IZA Institute of Labor Economics

Dominik Sachs

European University Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2015

Abstract

We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal.

Keywords: Capital Taxation, Insurance, Optimal Taxation, Redistribution

JEL Classification: H21, H23

Suggested Citation

Findeisen, Sebastian and Sachs, Dominik, Redistribution and Insurance with Simple Tax Instruments (June 2015). CEPR Discussion Paper No. DP10668, Available at SSRN: https://ssrn.com/abstract=2621572

Sebastian Findeisen (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Dominik Sachs

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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