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Optimal Capital Income Taxation with Means-tested Benefits

  • Cagri Seda Kumru


    (Research School of Economics, The Australian National University and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • John Piggott


    (ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

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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Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201215.

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Length: 27 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:asb:wpaper:201215
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  1. Selo Imrohoroglu & Ayse Imrohoroglu & Luisa Fuster, 2007. "Altruism, Incomplete Markets, and Tax Reform," 2007 Meeting Papers 491, Society for Economic Dynamics.
  2. Juan Carlos Conesa & Dirk Krueger, 2005. "On the Optimal Progressivity of the Income Tax Code," NBER Working Papers 11044, National Bureau of Economic Research, Inc.
  3. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  4. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers 5929, C.E.P.R. Discussion Papers.
  5. Dr Justin van de Ven, 2009. "Optimal Design of Means Tested Retirement Benefits," NIESR Discussion Papers 332, National Institute of Economic and Social Research.
  6. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," SSE/EFI Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
  7. repec:nsr:niesrd:332 is not listed on IDEAS
  8. Cagri Seda Kumru & John Piggott, 2010. "Should Public Retirement Pensions Be Means-tested?," DEGIT Conference Papers c015_049, DEGIT, Dynamics, Economic Growth, and International Trade.
  9. Yvette Alvarez & John Burbidge & Ted Farrell & Leigh Palmer, 1992. "Optimal Taxation in a Life-Cycle Model," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 111-22, February.
  10. Helen Robinson, 2003. "Are you experienced? British evidence on age-earnings profiles," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1101-1115.
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  12. 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, vol. 39(2), pages 307-28, May.
  13. Sagiri Kitao, 2014. "Sustainable Social Security: Four Options," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 756-779, October.
  14. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  15. Gustavo Ventura, . "Flat Tax Reform: A Quantitative Exploration," Computing in Economics and Finance 1997 172, Society for Computational Economics.
  16. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
  18. Carlos Garriga, 2001. "Optimal Fiscal Policy in Overlapping Generations Models," Working Papers in Economics 66, Universitat de Barcelona. Espai de Recerca en Economia.
  19. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, 04.
  20. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.
  21. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
  22. Kenichi Fukushima, 2010. "Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems," 2010 Meeting Papers 410, Society for Economic Dynamics.
  23. Richard Blundell & Ben Etheridge, 2010. "Consumption, Income and Earnings Inequality in Britain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 76-102, January.
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