Optimal Income Taxation with Asset Accumulation

49 Pages Posted: 16 Jan 2015

See all articles by Arpad Abraham

Arpad Abraham

European University Institute

Sebastian Koehne

Stockholm University - Institute for International Economic Studies (IIES)

Nicola Pavoni

Bocconi University - Department of Economics

Date Written: December 30, 2014

Abstract

Several frictions restrict the government’s ability to tax assets. First, it is very costly to monitor trades on international asset markets. Second, agents can resort to nonobservable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset taxation have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes become less progressive when governments face limitations in asset taxation. We evaluate the quantitative effect of imperfect asset taxation for two applications of our model.

Keywords: optimal income taxation, capital taxation, progressivity

JEL Classification: D820, D860, E210, H210

Suggested Citation

Abraham, Arpad and Koehne, Sebastian and Pavoni, Nicola, Optimal Income Taxation with Asset Accumulation (December 30, 2014). CESifo Working Paper Series No. 5138, Available at SSRN: https://ssrn.com/abstract=2550139 or http://dx.doi.org/10.2139/ssrn.2550139

Arpad Abraham

European University Institute ( email )

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

Sebastian Koehne (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm University
Stockholm, SE-10691
Sweden

Nicola Pavoni

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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