Should We Tax Capital Income or Wealth?

Corina Boar and Virgiliu Midrigan

American Economic Review: Insights, 2023, vol. 5, issue 2, 259-74

Abstract: We study optimal capital income and wealth taxation in an economy that reproduces the importance of private businesses for output and inequality. If entrepreneurs are subject to collateral constraints, they face heterogeneous rates of return, which generate a meaningful distinction between capital income and wealth taxation. We find that taxing capital income is preferable to taxing wealth because the efficiency gains from wealth taxation are swamped by the redistributional benefits of taxing the profits of richer entrepreneurs. Consequently, the gains from taxing wealth are modest. This conclusion is robust to the planner's preference for redistribution and allowing for nonlinear taxes.

JEL-codes: D31 H21 H23 H24 H25 K34 L26 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1257/aeri.20220192

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