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Preference heterogeneity and optimal capital income taxation

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  • Golosov, Mikhail
  • Troshkin, Maxim
  • Tsyvinski, Aleh
  • Weinzierl, Matthew

Abstract

We examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. In an environment where commodity taxes are allowed to be nonlinear functions of income and consumption, we derive an analytical expression that reveals the forces determining optimal commodity taxation. We then calibrate the model to evidence on the relationship between skills and preferences and extensively examine the quantitative case for taxes on future consumption (saving). In our baseline case of a unit intertemporal elasticity, optimal capital income tax rates are 2% on average and 4.5% on high earners. We find that the intertemporal elasticity of substitution has a substantial effect on optimal capital taxation. If the intertemporal elasticity is one-third, the optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, the optimal rates fall to 0.6% on average and 1.6% on high earners. Nevertheless, in all cases that we consider the welfare gains of using optimal capital taxes are small.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 97 (2013)
Issue (Month): C ()
Pages: 160-175

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Handle: RePEc:eee:pubeco:v:97:y:2013:i:c:p:160-175

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Optimal taxation; Capital taxation; Saving; Preference heterogeneity;

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  1. Narayana R. Kocherlakota & Luigi Pistaferri, 2006. "Household Heterogeneity and Real Exchange Rates," Levine's Bibliography 122247000000001275, UCLA Department of Economics.
  2. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Dynamic Taxes," NBER Working Papers 17642, National Bureau of Economic Research, Inc.
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  12. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
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Citations

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Cited by:
  1. Anna Grodecka & Karlygash Kuralbayeva, 2014. "Optimal Environmental Policy, Public Goods and Labor Markets over the Business Cycle," OxCarre Working Papers 137, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Matthew C. Weinzierl, 2012. "The Promise of Positive Optimal Taxation," NBER Working Papers 18599, National Bureau of Economic Research, Inc.
  3. Peter A. Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," CESifo Working Paper Series 3548, CESifo Group Munich.
  4. Benjamin B. Lockwood & Matthew C. Weinzierl, 2012. "De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution," NBER Working Papers 17784, National Bureau of Economic Research, Inc.
  5. Jang-Ting Guo & Alan Krause, . "Dynamic Nonlinear Income Taxation with Quasi-Hyperbolic Discounting and No Commitment," Discussion Papers 11/16, Department of Economics, University of York.
  6. Antoine Bozio & Guy Laroque & Cormac O'Dea, 2013. "Heterogeneity in time preference in older households," IFS Working Papers W13/02, Institute for Fiscal Studies.
  7. Hakki Yazici & Ctirad Slavik, 2013. "Machines, Buildings, and Optimal Dynamic Taxes," 2013 Meeting Papers 766, Society for Economic Dynamics.

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