Optimal Taxation of Capital Income with Heterogeneous Rates of Return
We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier i...
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| Published in | The Economic journal (London) Vol. 135; no. 665; pp. 180 - 211 |
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| Main Authors | , , , |
| Format | Journal Article |
| Language | English |
| Published |
09.12.2024
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| Online Access | Get full text |
| ISSN | 0013-0133 1468-0297 |
| DOI | 10.1093/ej/ueae083 |
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| Abstract | We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier individuals enjoy scale effects in wealth accumulation. In both cases, a strictly positive tax on capital income is part of any Pareto-efficient tax system. We derive a condition for the Pareto-efficient tax mix that relies solely on empirical sufficient statistics—not on social welfare weights—and find that Pareto-efficient taxes on capital income increase with the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that Pareto-efficient marginal tax rates on capital income are positive and substantial. |
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| AbstractList | We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier individuals enjoy scale effects in wealth accumulation. In both cases, a strictly positive tax on capital income is part of any Pareto-efficient tax system. We derive a condition for the Pareto-efficient tax mix that relies solely on empirical sufficient statistics—not on social welfare weights—and find that Pareto-efficient taxes on capital income increase with the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that Pareto-efficient marginal tax rates on capital income are positive and substantial. |
| Author | Jacobs, Bas Rusu, Alexandra V Spiritus, Kevin Gerritsen, Aart |
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| CitedBy_id | crossref_primary_10_1111_sjoe_12574 crossref_primary_10_1111_iere_12753 |
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