Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2020-06-29
Number: 20-038/VI
Author-Name: Aart Gerritsen
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Bas Jacobs
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Alexandra V. Rusu
Author-Workplace-Name: European Commission
Author-Name: Kevin Spiritus
Author-Workplace-Name: Erasmus University Rotterdam
Title: Optimal Taxation of Capital Income with Heterogeneous Rates of Return
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.
Classification-JEL: H21, H24
Keywords: Optimal taxation, capital taxation, heterogeneous returns
File-URL: https://papers.tinbergen.nl/20038.pdf
File-Format: application/pdf
File-Size: 1035423 bytes
Handle: RePEc:tin:wpaper:20200038