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Insurance and Redistribution with Simple Tax Instruments

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  • Sachs, Dominik
  • Findeisen, Sebastian

Abstract

We study optimal nonlinear taxation of labor income and linear taxation of capital income in a life-cycle framework with private information and idiosyncratic risk. We focus on simple history-independent tax instruments. We first analyze the welfare losses from this simplification as compared to optimal history-dependent policies. We find very small losses from restricting the complexity of savings wedges. Eliminating history dependence of labor wedges leads to larger welfare losses: moving from history dependence to age dependence yields approximately the same welfare losses as moving from age dependence to age independence and from nonlinear to linear income taxation. For optimal history- independent taxes, we provide a novel decomposition into a redistribution and an insurance component and a generalization of the top tax formula to dynamic environments. Capital taxation is desirable and yields sizable welfare gains, especially if labor income taxes are set below their optimal level.

Suggested Citation

  • Sachs, Dominik & Findeisen, Sebastian, 2015. "Insurance and Redistribution with Simple Tax Instruments," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113099, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:113099
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    References listed on IDEAS

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    1. Alejandro Badel & Mark Huggett & Wenlan Luo, 2020. "Taxing Top Earners: a Human Capital Perspective," Economic Journal, Royal Economic Society, vol. 130(629), pages 1200-1225.
    2. Ali Shourideh, 2013. "Optimal Taxation of Wealthy Individuals," 2013 Meeting Papers 261, Society for Economic Dynamics.
    3. Jacobs, Bas & Schindler, Dirk, 2012. "On the desirability of taxing capital income in optimal social insurance," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 853-868.
    4. Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
    5. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
    6. Julian Neira & Marek Kapicka, 2012. "Optimal Taxation in a Life-Cycle Economy with Endogenous Human Capital Formation," 2012 Meeting Papers 1164, Society for Economic Dynamics.
    7. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    8. Sören Blomquist & Luca Micheletto, 2008. "Age‐related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, March.
    9. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2013. "The Welfare Gains Of Age‐Related Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1219-1249, November.
    10. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
    11. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
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    Cited by:

    1. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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