A Theory of Optimal Capital Taxation
This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous random tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. The long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic parameters, the optimal tax rate on capitalized inheritance should be as high as 50%-60% - or even higher for top wealth holders - if the government has meritocratic preferences (i.e., puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, bequest taxation remains desirable in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique determinant of lifetime resources. In contrast to Chamley-Judd, positive capital taxation is desirable because our preferences allow for finite long run elasticities of inheritance to tax rates. Finally, we discuss how capital market imperfections and uninsurable shocks to rates of return can justify shifting one-off inheritance taxation toward lifetime capital taxation, and can account for the actual structure and mix of inheritance and capital taxation.
|Date of creation:||Apr 2012|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roger Guesnerie, 2004.
"Calcul économique et développement durable,"
Presses de Sciences-Po, vol. 55(3), pages 363-382.
- Joseph E. Stiglitz, 1978.
"Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence,"
in: Research in Taxation, pages 137-150
National Bureau of Economic Research, Inc.
- Stiglitz, Joseph E, 1978. "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S137-50, April.
- Jody Overland & Christopher D. Carroll & David N. Weil, 2000.
"Saving and Growth with Habit Formation,"
American Economic Review,
American Economic Association, vol. 90(3), pages 341-355, June.
- Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
- Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Mathematica code for 'Saving and Growth with Habit Formation' and 'Comparison Utility in a Growth Model'," QM&RBC Codes 43, Quantitative Macroeconomics & Real Business Cycles.
- Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998.
"Growth Effects of Income and Consumption Taxes,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 30(4), pages 721-44, November.
- Thomas Piketty, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 173-189.
- Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, vol. 60(6), pages 1387-1406, November.
- Sterner, Thomas & Persson, U. Martin, 2007.
"An Even Sterner Review: Introducing Relative Prices into the Discounting Debate,"
dp-07-37, Resources For the Future.
- Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
- Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834.
- Bourguignon, Francois, 1981. "Pareto Superiority of Unegalitarian Equilibria in Stiglitz' Model of Wealth Distribution with Convex Saving Function," Econometrica, Econometric Society, vol. 49(6), pages 1469-1475, November.
- Nirei, Makoto, 2009. "Pareto Distributions in Economic Growth Models," IIR Working Paper 09-05, Institute of Innovation Research, Hitotsubashi University.
- Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986.
"Assessing Dynamic Efficiency: Theory and Evidence,"
NBER Working Papers
2097, National Bureau of Economic Research, Inc.
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
- (IFS), Institute for Fiscal Studies & Mirrlees, James (ed.), 2011. "Tax By Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553747, December.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8946. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.