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A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk

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  • Vidar Christiansen

    (Norwegian School of Management, P.O. Box 580, N-1301, Sandvika, Norway)

Abstract

A simple portfolio model is used to examine the efficiency effects of capital income taxes when the economy faces aggregate risk. To achieve a first best optimum the use of state contingent lump sum taxes is required. Through the tax policy the riskiness of total consumption is partly assigned to the private consumption and partly to the public consumption. State independent income taxes may generate a misallocation of risk and distort the allocation of resources between assets. The second best optimum, representing a trade-off between these inefficiencies, is characterized. Uniform taxation is shown to be optimal only in very special cases. Finally, the second best optimality rule for public consumption is extended to the case of uncertainty. The Geneva Papers on Risk and Insurance Theory (1993) 18, 55–76. doi:10.1007/BF01125818

Suggested Citation

  • Vidar Christiansen, 1993. "A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(1), pages 55-76, June.
    • Handle: RePEc:pal:genrir:v:18:y:1993:i:1:p:55-76
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    Citations

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    Cited by:

    1. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
    2. Robin Boadway & Kevin Spiritus, 2021. "Optimal Taxation of Normal and Excess Returns to Risky Assets," Tinbergen Institute Discussion Papers 21-025/VI, Tinbergen Institute.
    3. Dirk Schindler, 2017. "Wealth Taxation, Non-listed Firms, and the Risk of Entrepreneurial Investment," CESifo Working Paper Series 6537, CESifo.
    4. Schindler, Dirk, 2003. "Optimal Income Taxation with a Risky Asset: The Triple Income Tax," CoFE Discussion Papers 03/11, University of Konstanz, Center of Finance and Econometrics (CoFE).
    5. Schindler, Dirk, 2008. "Human Capital, Multiple Income Risk and Social Insurance," Discussion Papers 2008/18, Norwegian School of Economics, Department of Business and Management Science.
    6. Kevin Spiritus & Robin Boadway, 2017. "The Optimal Taxation of Risky Capital Income: The Rate of Return Allowance," Working Papers of Department of Economics, Leuven 573073, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    7. Dirk Schindler, 2008. "Taxing Risky Capital Income - A Commodity Taxation Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(3), pages 311-333, September.
    8. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    9. Syed M. Ahsan & Panagiotis Tsigaris, 2003. "Choice of Tax Base Revisited: Cash Flow vs. Prepayment Approaches to Consumption Taxation," CESifo Working Paper Series 983, CESifo.

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