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Optimal Income Taxation with a Risky Asset – The Triple Income Tax

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  • Dirk Schindler

Abstract

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.

Suggested Citation

  • Dirk Schindler, 2006. "Optimal Income Taxation with a Risky Asset – The Triple Income Tax," CESifo Working Paper Series 1834, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1834
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    References listed on IDEAS

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    1. Peter Sørensen, 1994. "From the global income tax to the dual income tax: Recent tax reforms in the Nordic countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(1), pages 57-79, February.
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    4. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-98, December.
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    6. Vidar Christiansen, 1993. "A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(1), pages 55-76, June.
    7. Wolfram Richter, 1992. "The optimal taxation of risky capital income: An elasticity rule," Journal of Economics, Springer, vol. 55(1), pages 101-111, February.
    8. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-798, December.
    9. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    10. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
    11. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
    12. Wolfram F. RICHTER & Wolfgang WIEGARD, 1991. "On the Diferrence between Income and Consumption Taxes when the Return to Savings is uncertain," Discussion Papers (REL - Recherches Economiques de Louvain) 1991044, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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    Keywords

    optimal taxation; uncertainty; consumption tax; triple income tax;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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