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On the Desirability of Taxing Capital Income in Optimal Social Insurance

  • Bas Jacobs

    ()

    (Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands)

  • Dirk Schindler

    (Department of Economics, University of Konstanz, Germany)

This paper analyzes optimal linear taxes on labor income and savings in a two-period life cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-02.

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Length: 43 pages
Date of creation: 23 Jan 2012
Date of revision:
Handle: RePEc:knz:dpteco:1202
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