Preference Heterogeneity and Optimal Capital Income Taxation

37 Pages Posted: 18 Dec 2010 Last revised: 29 Nov 2024

See all articles by Mikhail Golosov

Mikhail Golosov

Princeton University - Department of Economics

Maxim Troshkin

Yale University, Department of Economics

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Matthew Weinzierl

Harvard Business School - Business, Government and the International Economy Unit

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

Golosov, Mikhail and Troshkin, Maxim and Tsyvinski, Aleh and Tsyvinski, Aleh and Weinzierl, Matthew, Preference Heterogeneity and Optimal Capital Income Taxation (December 2010). NBER Working Paper No. w16619, Available at SSRN: https://ssrn.com/abstract=1727099

Mikhail Golosov (Contact Author)

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ 08544-1021
United States

Maxim Troshkin

Yale University, Department of Economics ( email )

493 College St
New Haven, CT CT 06520
United States

HOME PAGE: http://www.troshkin.com

Aleh Tsyvinski

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Matthew Weinzierl

Harvard Business School - Business, Government and the International Economy Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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