The Optimal Taxation of Risky Capital Income: The Rate of Return Allowance

44 Pages Posted: 15 Feb 2017

See all articles by Kevin Spiritus

Kevin Spiritus

KU Leuven; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Robin Boadway

Queen's University; CESifo (Center for Economic Studies and Ifo Institute); Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Date Written: January 24, 2017

Abstract

We study the optimality of taxing capital income according to a Rate-of-Return Allowance proposed by the Mirrlees Review. In a mean-variance framework the optimal tax on risk-free returns is zero with constant returns to scale in private investment, but positive with decreasing returns to scale, and vice versa. The optimal tax rate on excess returns to risky assets is positive if the stochastic tax revenue is returned to the household by variable public good provision. If it is returned as a stochastic lump sum, the optimal tax on excess returns is irrelevant with only aggregate risk, and approaches 100% if there is also idiosyncratic risk.

Keywords: optimal capital taxation, rate of return allowance

JEL Classification: H210, H230, H240

Suggested Citation

Spiritus, Kevin and Spiritus, Kevin and Boadway, Robin, The Optimal Taxation of Risky Capital Income: The Rate of Return Allowance (January 24, 2017). Available at SSRN: https://ssrn.com/abstract=2917204 or http://dx.doi.org/10.2139/ssrn.2917204

Kevin Spiritus

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Robin Boadway (Contact Author)

Queen's University ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada
613-533-2266 (Phone)
613-533-6668 (Fax)

HOME PAGE: http://qed.econ.queensu.ca/pub/faculty/boadway/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Ste-Foy, Quebec G1K 7P4
Canada

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