Optimal Capital Income Taxation with Means‐Tested Benefits

36 Pages Posted: 13 Jun 2017

See all articles by Cagri S. Kumru

Cagri S. Kumru

Australian National University (ANU)

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

This paper studies the interaction between capital income taxation and a means‐tested age pension. Our results document that the existence of a social insurance program financed from general revenue puts an upward pressure on the optimal tax rate. We also show that there is a negative relation between taper (benefit‐reduction) and optimal capital income tax rates. The potential welfare gain from optimizing capital taxation in the presence of a universal retirement transfer system is relatively higher. However, when the transfer is substantially means tested, the gain is lower, because the means test effectively operates as a tax on retirement capital.

Suggested Citation

Kumru, Cagri S. and Piggott, John, Optimal Capital Income Taxation with Means‐Tested Benefits (July 2017). Scottish Journal of Political Economy, Vol. 64, Issue 3, pp. 227-262, 2017. Available at SSRN: https://ssrn.com/abstract=2985212 or http://dx.doi.org/10.1111/sjpe.12130

Cagri S. Kumru (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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