Optimal Taxation of Wealthy Individuals

Ali Shourideh

No 261, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the determinants of optimal taxes for wealthy individuals faced with capital income risk. I develop a model of optimal taxation of capital income in which wealth and income inequality is a result of capital income shocks together with frictions in financial markets. I use the model to study optimal taxation of various types of capital income: capital income from controlled businesses, outside the business as well as bequests. In presence of risk-return trade-offs, i.e., when more productive investments are riskier, I show that it is typically optimal to have progressive saving taxes. Furthermore, in an intergenerational context, I show that bequest taxes should be negative. Finally, I study the implications of the model on long run efficient distribution of wealth. I show that the long-run distribution of wealth has a fat-tail distribution and compare the efï¬ cient tail of the wealth distribution to the one resulting from an ad-hoc incomplete market model.

Date: 2013
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:261

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