Capital Income Taxes with Heterogenous Discount Rates
Name
Diamond0922.pdf
Size
282.34 KB
Format
Adobe PDF
Checksum (MD5)
7b7381eda93db205638db3daed0f85a9
Author(s)
Diamond, Peter A.
Sinnewijn, Johannes
Date Issued
July 14, 2009
Publisher
Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
Series/Report no.
Working paper, Massachusetts Institute of Technology, Dept. of Economics;09-22
Abstract
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 preference for the future. However, a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is sufficiently high. There are also some results on optimal taxes that parallel the results on introducing small taxes.
Description
Originally published July 14, 2009. Revised January 27, 2010.
Subjects
Capital Income
Discount Rates
Optimal Taxation
Terms of Use
An error occurred on the license name.
Persistent DSpace Link
