Optimal Taxation of Capital Income with Heterogeneous Rates of Return

Aart Gerritsen, Bas Jacobs, Alexandra V. Rusu and Kevin Spiritus
Additional contact information
Aart Gerritsen: Erasmus University Rotterdam
Alexandra V. Rusu: European Commission

No 20-038/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.

Keywords: Optimal taxation; capital taxation; heterogeneous returns (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
Date: 2020-06-29
New Economics Papers: this item is included in nep-ore, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Optimal Taxation of Capital Income with Heterogeneous Rates of Return (2025)
Working Paper: Optimal Taxation of Capital Income with Heterogeneous Rates of Return (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20200038

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