Taxing Capital? Not a Bad Idea After All!

Juan Carlos Conesa (), Sagiri Kitao () and Dirk Krüger
Authors registered in the RePEc Author Service: Dirk Krueger ()

No 5929, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.

Keywords: capital taxation; optimal taxation; progressive taxation (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2006-11
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP5929.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Taxing Capital? Not a Bad Idea After All! (2007)
Working Paper: Taxing Capital? Not a Bad Idea After All! (2006)
Working Paper: Taxing Capital? Not a Bad Idea After All! (2006)
Working Paper: Taxing Capital: Not a Bad Idea After All (2004)
Journal Article: Taxing Capital? Not a Bad Idea after All! (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:5929

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP5929.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().