Optimal Capital Income Taxation with Means-Tested Benefits
CAMA Working Paper 21/2012
28 Pages Posted: 4 Jun 2012
Date Written: June 3, 2012
This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to capital income taxation in a life-cycle context.
Keywords: Dynamic general equilibrium, taxation, welfare
JEL Classification: E21, E62, H55
Suggested Citation: Suggested Citation