Optimal Income Taxation with Asset Accumulation
49 Pages Posted: 16 Jan 2015
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: Suggested Citation