Redistribution and insurance with simple tax instruments

Sebastian Findeisen and Dominik Sachs

Journal of Public Economics, 2017, vol. 146, issue C, 58-78

Abstract: We analyze optimal taxation of labor and capital income in a life cycle framework with idiosyncratic income risk and ex-ante heterogeneity. Tax instruments are simple in that they can only condition on current income. We provide a decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor income tax rates and provides a lower bound on optimal taxes. Optimal capital taxes are significant.

Keywords: Optimal Taxation; Capital Taxation; Redistribution; Insurance (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Redistribution and Insurance with Simple Tax Instruments (2015)
Working Paper: Redistribution and Insurance with Simple Tax Instruments (2015)
Working Paper: Redistribution and Insurance with Simple Tax Instruments (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:146:y:2017:i:c:p:58-78

DOI: 10.1016/j.jpubeco.2016.12.006

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