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Preference Heterogeneity and Optimal Capital Income Taxation

  • Matthew Weinzierl

    (Harvard Business School)

  • Aleh Tsyvinski

    (Yale)

  • Mikhail Golosov

    (Yale)

We analytically and quantitatively examine a prominent justifi cation for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 748.

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Date of creation: 2010
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Handle: RePEc:red:sed010:748
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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