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Optimal Redistributive Taxation$
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Matti Tuomala

Print publication date: 2016

Print ISBN-13: 9780198753414

Published to Oxford Scholarship Online: March 2016

DOI: 10.1093/acprof:oso/9780198753414.001.0001

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Optimal capital income taxation

Optimal capital income taxation

Chapter:
(p.355) 14 Optimal capital income taxation
Source:
Optimal Redistributive Taxation
Author(s):

Matti Tuomala

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198753414.003.0014

Chapter 14 asks the question of how capital income should be taxed. One of the limitations of the standard income tax model is that it does not address intertemporal problems. In an intertemporal setting, capital income taxation becomes relevant. The theoretical case for capital income taxation is discussed in this chapter. The question of how to tax capital incomes is also very topical after several decades of growing wealth/income ratio in many advanced countries (see Piketty and Zucman, 2014). Two lines of thought in the tax literature rationalize the zero tax on capital. First the Atkinson–Stiglitz theorem, under special assumptions on preferences, implies zero tax on income from capital. The second line supporting zero capital taxation is by Chamley and Judd. When individuals differ not only in productivity (wage) as in the standard model but also, say, in inherited wealth, discount factor, longevity, we have a good case for taxing capital income.

Keywords:   intertemporal, capital tax, discount factor, uncertainty, habit formation, equal opportunity, inherited wealth, income-shifting, overlapping generations

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