Optimal Redistributive Wealth Taxation When Wealth is More than Just Capital

46 Pages Posted: 14 Feb 2020

See all articles by Max Franks

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: 2020

Abstract

We show how normative standpoints determine optimal taxation of wealth. Since wealth is not equal to capital, we find very different welfare implications of land rent-, bequest- and capital taxation. It is mainly land rents that should be taxed. We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We compare three normative views. First, the Kaldor-Hicks criterion favors the laissez-faire equilibrium. Second, with prioritarian welfare functions based on money-metric utility, high land rent taxes are optimal due to a portfolio effect. Third, if society disapproves of bequeathing, bequest taxation becomes slightly more desirable.

Keywords: optimal taxation, social welfare, wealth inequality, land rent tax, Georgism

JEL Classification: D310, D630, E620, H210, H230, Q240

Suggested Citation

Franks, Max and Edenhofer, Ottmar, Optimal Redistributive Wealth Taxation When Wealth is More than Just Capital (2020). CESifo Working Paper No. 8093, Available at SSRN: https://ssrn.com/abstract=3538006 or http://dx.doi.org/10.2139/ssrn.3538006

Max Franks (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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