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Labor-dependent capital income taxation that encourages work and saving

Sagiri Kitao

No 435, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper proposes a simple mechanism of capital taxation that is negatively correlated with labor supply. Using a life-cycle model of heterogeneous agents, I show that this tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle, when they would otherwise work less. This reformed system also adds to the saving motive and raises aggregate capital. Moreover, the increased economic activities expand the tax base, and the revenue-neutral reform results in a lower average tax rate. My findings show that this tax scheme improves long-run welfare and that the majority of current generations would experience a welfare gain from a transition to the reformed system.

Keywords: capital income taxation; life cycle (search for similar items in EconPapers)
JEL-codes: E62 H24 H31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-02-01
New Economics Papers: this item is included in nep-acc, nep-dge and nep-pbe
Note: For a published version of this report, see Sagiri Kitao, "Labor-Dependent Capital Income Taxation," Journal of Monetary Economics 57, no. 8 (November 2010): 959-74.
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Citations: View citations in EconPapers (6)

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