Optimal Income Taxation with a Risky Asset – The Triple Income Tax

No 03-11, CoFE Discussion Paper from Center of Finance and Econometrics, University of Konstanz

Abstract: We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return that an interest adjusted income tax is optimal. This tax leaves a safe component of interest income tax free and taxes the excess return with a special tax rate. There is no trade off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a triple income tax. This distinction and a special tax rate on the excess return is necessary in order to have an optimal risk shifting effect.

Keywords: Optimal Taxation; Uncertainty; Consumption Tax; Triple Income Tax (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: Written 2003-12-15
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Working Paper: Optimal Income Taxation with a Risky Asset – The Triple Income Tax (2006)
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