Preference Heterogeneity and Optimal Capital Income Taxation
37 Pages Posted: 18 Dec 2010 Last revised: 29 Nov 2024
Date Written: December 2010
Abstract
We examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. In an environment where commodity taxes are allowed to be nonlinear functions of income and consumption, we derive an analytical expression that reveals the forces determining optimal commodity taxation. We then calibrate the model to evidence on the relationship between skills and preferences and extensively examine the quantitative case for taxes on future consumption (saving). In our baseline case of a unit intertemporal elasticity, optimal capital income tax rates are 2% on average and 4.5% on high earners. We find that the intertemporal elasticity of substitution has a substantial effect on optimal capital taxation. If the intertemporal elasticity is one-third, optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, optimal rates fall to 0.6% on average and 1.6% on high earners. Nevertheless, in all cases that we consider the welfare gains of using optimal capital taxes are small.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Designing Optimal Disability Insurance: A Case for Asset Testing
By Mikhail Golosov and Aleh Tsyvinski
-
Optimal Taxation with Endogenous Insurance Markets
By Mikhail Golosov and Aleh Tsyvinski
-
Inequality, Social Discounting, and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Inequality, Social Discounting and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Dynamic Mechanism Design with Hidden Income and Hidden Actions: Technical Appendix
-
Dynamic Contracting with Persistent Shocks
By Yuzhe Zhang
-
Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending
By Árpád J. Ábrahám and Nicola Pavoni