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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

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

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  1. Kocherlakota, Narayana & Pistaferri, Luigi, 2005. "Asset Pricing Implications of Pareto Optimality with Private Information," CEPR Discussion Papers 4930, C.E.P.R. Discussion Papers.
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  4. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report 293, Federal Reserve Bank of Minneapolis.
  5. Raj Chetty, 2009. "Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," NBER Working Papers 15616, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. 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.
  2. Matthew C. Weinzierl, 2012. "The Promise of Positive Optimal Taxation," NBER Working Papers 18599, National Bureau of Economic Research, Inc.
  3. Anna Grodecka & Karlygash Kuralbayeva, 2014. "Prices vs Quantities Debate: The role of business cycles," OxCarre Working Papers 137, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  4. 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.
  5. Antoine Bozio & Guy Laroque & Cormac O'Dea, 2013. "Heterogeneity in time preference in older households," IFS Working Papers W13/02, Institute for Fiscal Studies.
  6. Hakki Yazici & Ctirad Slavik, 2013. "Machines, Buildings, and Optimal Dynamic Taxes," 2013 Meeting Papers 766, Society for Economic Dynamics.
  7. 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.

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