Capital Income Taxes With Heterogeneous Discount Rates
With heterogeneity in both skills and preferences for the future, the Atkinson-Stiglitz result that savings should not be taxed with optimal taxation of earnings does not hold. Empirical evidence shows that on average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to a lower earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. This can be implemented by earnings varying rules on contributions to tax-favored retirement accounts. However, introducing a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is succinctly high. There are also some results on optimal taxes that parallel the results on introducing small taxes.
|Date of creation:||Jun 2009|
|Date of revision:||Jun 2009|
|Contact details of provider:|| Postal: Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467|
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/
More information through EDIRC
References listed on IDEAS
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 H. Gordon & Wojciech Kopczuk, 2014.
"The Choice of the Personal Income Tax Base,"
NBER Working Papers
20227, National Bureau of Economic Research, Inc.
- Karen E. Dynan & Jonathan Skinner & Stephen Zeldes, 2000.
"Do the rich save more?,"
Finance and Economics Discussion Series
2000-52, Board of Governors of the Federal Reserve System (U.S.).
- Ritva Tarkiainen & Matti Tuomala, 2007.
"On optimal income taxation with heterogeneous work preferences,"
International Journal of Economic Theory,
The International Society for Economic Theory, vol. 3(1), pages 35-46.
- Ritva Tarkiainen & Matti Tuomala, 2004. "On Optimal Income Taxation with Heterogenous Work Preferences," Working Papers 0432, University of Tampere, School of Management, Economics.
- Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
- Peter A. Diamond, 2005.
"Taxation, Incomplete Markets, and Social Security,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262541823, December.
- Narayana Kocherlakota, 2004.
"Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation,"
122247000000000729, UCLA Department of Economics.
- Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
- Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
- Louis Kaplow, 2008. "Optimal Policy with Heterogeneous Preferences," NBER Working Papers 14170, National Bureau of Economic Research, Inc.
- Christopher F. Chabris & David Laibson & Carrie L. Morris & Jonathon P. Schuldt & Dmitry Taubinsky, 2008.
"Individual Laboratory-Measured Discount Rates Predict Field Behavior,"
NBER Working Papers
14270, National Bureau of Economic Research, Inc.
- Christopher Chabris & David Laibson & Carrie Morris & Jonathon Schuldt & Dmitry Taubinsky, 2008. "Individual laboratory-measured discount rates predict field behavior," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 237-269, December.
- Chabris, Christopher F. & Laibson, David I. & Morris, Carrie L. & Schuldt, Jonathon P. & Taubinsky, Dmitry, 2008. "Individual Laboratory-Measured Discount Rates Predict Field Behavior," Scholarly Articles 11130522, Harvard University Department of Economics.
- BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001.
"Optimal redistribution with heterogeneous preferences for leisure,"
CORE Discussion Papers
2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Robin Boadway & Maurice Marchand & Pierre Pestieau & María del Mar Racionero, 2002. "Optimal Redistribution with Heterogeneous Preferences for Leisure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 475-498, October.
- BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU , Pierre & RACIONERO, Maria del mar, "undated". "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers RP 1566, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Katherine Cuff, 1998.
"Optimality of Workfare with Heterogeneous Preferences,"
968, Queen's University, Department of Economics.
- Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
- Sanna Tenhunen & Matti Tuomala, 2007.
"On optimal lifetime redistribution policy,"
0750, University of Tampere, School of Management, Economics.
- J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
- Sören Blomquist & Vidar Christiansen, 2004.
"Taxation and Heterogeneous Preferences,"
CESifo Working Paper Series
1244, CESifo Group Munich.
- Kaplow Louis, 2008. "Optimal Policy with Heterogeneous Preferences," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-30, September.
- Roger H. Gordon, 2003.
"Taxation of Interest Income,"
NBER Working Papers
9503, National Bureau of Economic Research, Inc.
- Emmanuel Saez, 2000.
"The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes,"
NBER Working Papers
8029, National Bureau of Economic Research, Inc.
- Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
- Diamond, Peter, 2006. "Optimal tax treatment of private contributions for public goods with and without warm glow preferences," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 897-919, May.
This item is featured on the following reading lists or Wikipedia pages:
- Capital Income Taxes with Heterogeneous Discount Rates (AEJ:EP 2011) in ReplicationWiki
When requesting a correction, please mention this item's handle: RePEc:crr:crrwps:wp2009-14. 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: (Amy Grzybowski)or (Christopher F Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.