Optimal Taxation of Capital Income with Heterogeneous Rates of Return

51 Pages Posted: 7 Jul 2020

See all articles by Aart Gerritsen

Aart Gerritsen

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

Bas Jacobs

Erasmus University Rotterdam (EUR); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Alexandra Victoria Rusu

affiliation not provided to SSRN

Kevin Spiritus

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

Date Written: 2020

Abstract

There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.

JEL Classification: H210, H240

Suggested Citation

Gerritsen, Aart and Jacobs, Bas and Rusu, Alexandra Victoria and Spiritus, Kevin and Spiritus, Kevin, Optimal Taxation of Capital Income with Heterogeneous Rates of Return (2020). Available at SSRN: https://ssrn.com/abstract=3642393 or http://dx.doi.org/10.2139/ssrn.3642393

Aart Gerritsen (Contact Author)

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

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

Bas Jacobs

Erasmus University Rotterdam (EUR) ( email )

PO Box 1738
Rotterdam, Zuid-Holland 3000 DR
Netherlands
+314081452 (Phone)

HOME PAGE: http://personal.eur.nl/bjacobs

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Alexandra Victoria Rusu

affiliation not provided to SSRN

No Address Available

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

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