With heterogeneity in both skills and preferences for the future, the Atkinson-Stiglitz result that savings should not be taxed with optimal taxation of earnings does not hold. On average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to a lower earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. However, introducing a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is sufficiently high. There are also some results on optimal linear taxes that parallel the results on introducing small taxes.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
15115.
Length: Date of creation: Jun 2009 Date of revision: Handle: RePEc:nbr:nberwo:15115
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Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004.
"Do the Rich Save More?,"
Journal of Political Economy,
University of Chicago Press, vol. 112(2), pages 397-444, April.
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Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000.
"Do the Rich Save More?,"
NBER Working Papers
7906, National Bureau of Economic Research, Inc.
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