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Optimal Income Taxation with a Risky Asset – The Triple Income Tax

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  • Dirk Schindler

Abstract

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.

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  • Dirk Schindler, 2006. "Optimal Income Taxation with a Risky Asset – The Triple Income Tax," CESifo Working Paper Series 1834, CESifo.
    • Handle: RePEc:ces:ceswps:_1834
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    More about this item

    Keywords

    optimal taxation; uncertainty; consumption tax; triple income tax;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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