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On the Desirability of Taxing Capital Income in Optimal Social Insurance
On the Desirability of Taxing Capital Income in Optimal Social Insurance
Date
2012
Authors
Jacobs, Bas
Schindler, Dirk
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Working Paper Series / Department of Economics; 2012-02
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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.
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330 Economics
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Optimal Capital Taxation, Risk, Atkinson-Stiglitz theorem
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