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Redistribution and Insurance with Simple Tax Instruments

Sebastian Findeisen and Dominik Sachs

No 9123, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel 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 tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal.

Keywords: optimal taxation; capital taxation; redistribution; insurance (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015-06
New Economics Papers: this item is included in nep-dge, nep-ias, nep-pbe and nep-pub
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Related works:
Journal Article: Redistribution and insurance with simple tax instruments (2017) Downloads
Working Paper: Redistribution and Insurance with Simple Tax Instruments (2015) Downloads
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