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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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File URL: http://cepar.edu.au/media/80539/wp_13_optimal_capital.pdf
File Function: First version, 2012
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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. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  2. Carlos Garriga, 2001. "Optimal Fiscal Policy in Overlapping Generations Models," Working Papers in Economics 66, Universitat de Barcelona. Espai de Recerca en Economia.
  3. 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.
  4. Imrohoroglu, S., 1997. "A Quantitative Analysis of Capital Income Taxation," Papers 1997/12, Koc University.
  5. Fuster, Luisa & Imrohoroglu, Ayse & Imrohoroglu, Selahattin, 2008. "Altruism, incomplete markets, and tax reform," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 65-90, January.
  6. 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.
  7. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  8. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  9. Juan Carlos Conesa & Dirk Krueger, 2002. "On the Optimal Progressivity of the Income Tax Code," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 4, Centro de Altisimos Estudios Rios Perez (CAERP).
  10. repec:nsr:niesrd:332 is not listed on IDEAS
  11. 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.
  12. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.
  13. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
  14. 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.
  15. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007. "Insurance and Opportunities: A Welfare Analysis of Labor Market Risk," NBER Working Papers 13673, National Bureau of Economic Research, Inc.
  16. Helen Robinson, 2003. "Are you experienced? British evidence on age-earnings profiles," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1101-1115.
  17. 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.
  18. Mikhail Golosov & Aleh Tsyvinski, 2004. "Designing Optimal Disability Insurance: A Case for Asset Testing," NBER Working Papers 10792, National Bureau of Economic Research, Inc.
  19. Kenichi Fukushima, 2010. "Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems," 2010 Meeting Papers 410, Society for Economic Dynamics.
  20. Dr Justin van de Ven, 2009. "Optimal Design of Means Tested Retirement Benefits," NIESR Discussion Papers 2272, National Institute of Economic and Social Research.
  21. 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.
  22. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  23. 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.
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