Optimal Savings Taxation when Individuals have Different CRRA Utility Functions

Alan Krause

Discussion Papers from Department of Economics, University of York

Abstract: Recent empirical research has found that high-skill individuals tend to be less risk averse than low-skill individuals, which implies that their respective constant relative risk aversion (CRRA) utility functions have different curvature. This paper examines the effects of this form of preference heterogeneity on the classic question of whether taxing savings is desirable when the government also implements optimal nonlinear income taxation. It is shown that taxing or subsidising savings may be optimal, even if labour is separable from consumption in the utility function. Specifically, if the individuals' discount rate is lower (resp. higher) than the market interest rate, it is optimal to tax (resp. subsidise) savings. If the individuals' discount rate is equal to the market interest rate, zero taxation of savings is optimal. This basic relationship holds under both linear and nonlinear taxation of savings.

Keywords: Savings taxation; nonlinear income taxation; preference heterogeneity. (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
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Citations: View citations in EconPapers (4)

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Journal Article: Optimal Savings Taxation when Individuals Have Different CRRA Utility Functions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:12/13

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