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Optimal Capital Income Taxation with Means-tested Benefits

Cagri Kumru () and John Piggott ()

No 201215, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to capital income taxation in a life-cycle context.

Keywords: Dynamic general equilibrium; taxation; welfare (search for similar items in EconPapers)
JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-pub
Date: 2012-05
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