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Optimal Capital Income Taxation with Means-tested Benefits

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  • Cagri Seda Kumru

    ()

  • John Piggott

    ()

Abstract

This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to capital income taxation in a life-cycle context.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2012/212012.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-21.

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Length: 28 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-21

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References

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  1. Helen Robinson, 2003. "Are you experienced? British evidence on age-earnings profiles," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(9), pages 1101-1115.
  2. Conesa, Juan Carlos & Krüger, Dirk, 2005. "On the Optimal Progressivity of the Income Tax Code," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5040, C.E.P.R. Discussion Papers.
  3. Juan C. Conesa & Dirk Krueger, 2004. "Taxing Capital: Not a Bad Idea After All," 2004 Meeting Papers, Society for Economic Dynamics 403, Society for Economic Dynamics.
  4. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  5. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  6. Carlos Garriga, 2001. "Optimal Fiscal Policy in Overlapping Generations Models," Working Papers in Economics, Universitat de Barcelona. Espai de Recerca en Economia 66, Universitat de Barcelona. Espai de Recerca en Economia.
  7. Cagri Seda Kumru & John Piggott, 2010. "Should Public Retirement Pensions Be Means-tested?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_049, DEGIT, Dynamics, Economic Growth, and International Trade.
  8. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, Elsevier, vol. 28(1), pages 59-83, October.
  9. Fuster, Luisa & Imrohoroglu, Ayse & Imrohoroglu, Selahattin, 2008. "Altruism, incomplete markets, and tax reform," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(1), pages 65-90, January.
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  11. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, Elsevier, vol. 105(2), pages 338-369, August.
  12. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  13. Sagiri Kitao, 2011. "Sustainable social security: four options," Staff Reports, Federal Reserve Bank of New York 505, Federal Reserve Bank of New York.
  14. Kenichi Fukushima, 2010. "Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems," 2010 Meeting Papers, Society for Economic Dynamics 410, Society for Economic Dynamics.
  15. Imrohoroglu, Selahattin, 1998. "A Quantitative Analysis of Capital Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 307-28, May.
  16. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(8), pages 959-974, November.
  17. repec:nsr:niesrd:332 is not listed on IDEAS
  18. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(528), pages 556-590, 04.
  19. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 501-525, April.
  20. Yvette Alvarez & John Burbidge & Ted Farrell & Leigh Palmer, 1992. "Optimal Taxation in a Life-Cycle Model," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 25(1), pages 111-22, February.
  21. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  22. Richard Blundell & Ben Etheridge, 2010. "Consumption, Income and Earnings Inequality in Britain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 76-102, January.
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Cited by:
  1. Hans Fehr & Fabian Kindermann, 2012. "Optimal Taxation with Current and Future Cohorts," CESifo Working Paper Series 3973, CESifo Group Munich.

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