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Labor-dependent capital income taxation

  • Kitao, Sagiri

Capital taxation which is negatively correlated with labor supply is proposed. This paper uses a life-cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would work less. The system also adds to the saving motive of prime-age households and raises aggregate capital. The increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate. The negative cross-dependence generates a sizable welfare gain in the long-run relative to the tax system that treats labor and capital income separately as a tax base. The reform, however, can hurt the elderly during the transition with a high marginal tax on their capital income.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 8 (November)
Pages: 959-974

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Handle: RePEc:eee:moneco:v:57:y:2010:i:8:p:959-974
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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