On the Desirability of Taxing Capital Income in Optimal Social Insurance

Bas Jacobs and Dirk Schindler

No 2012-02, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: This paper analyzes optimal linear taxes on labor income and savings in a two-period life cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair.

Keywords: Optimal Capital Taxation; Risk; Atkinson-Stiglitz theorem (search for similar items in EconPapers)
JEL-codes: D80 H21 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2012-01-23
New Economics Papers: this item is included in nep-age, nep-dge and nep-ias
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Citations: View citations in EconPapers (17)

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Journal Article: On the desirability of taxing capital income in optimal social insurance (2012)
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