Optimal Savings Taxation when Individuals have Different CRRA Utility Functions
AbstractRecent empirical research has found that high-skill individuals tend to be less risk averse than low-skill individuals, which implies that their respective constant relative risk aversion (CRRA) utility functions have different curvature. This paper examines the effects of this form of preference heterogeneity on the classic question of whether taxing savings is desirable when the government also implements optimal nonlinear income taxation. It is shown that taxing or subsidising savings may be optimal, even if labour is separable from consumption in the utility function. Specifically, if the individuals' discount rate is lower (resp. higher) than the market interest rate, it is optimal to tax (resp. subsidise) savings. If the individuals' discount rate is equal to the market interest rate, zero taxation of savings is optimal. This basic relationship holds under both linear and nonlinear taxation of savings.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 12/13.
Date of creation: May 2012
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Savings taxation; nonlinear income taxation; preference heterogeneity.;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-PBE-2012-05-15 (Public Economics)
- NEP-PUB-2012-05-15 (Public Finance)
- NEP-UPT-2012-05-15 (Utility Models & Prospect Theory)
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