Preference heterogeneity and optimal capital income taxation

Mikhail Golosov, Maxim Troshkin, Aleh Tsyvinski, Matthew Weinzierl

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

We examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. In an environment where commodity taxes are allowed to be nonlinear functions of income and consumption, we derive an analytical expression that reveals the forces determining optimal commodity taxation. We then calibrate the model to evidence on the relationship between skills and preferences and extensively examine the quantitative case for taxes on future consumption (saving). In our baseline case of a unit intertemporal elasticity, optimal capital income tax rates are 2% on average and 4.5% on high earners. We find that the intertemporal elasticity of substitution has a substantial effect on optimal capital taxation. If the intertemporal elasticity is one-third, the optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, the optimal rates fall to 0.6% on average and 1.6% on high earners. Nevertheless, in all cases that we consider the welfare gains of using optimal capital taxes are small.

Original languageEnglish (US)
Pages (from-to)160-175
Number of pages16
JournalJournal of Public Economics
Volume97
Issue number1
DOIs
StatePublished - Jan 2013

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Capital taxation
  • Optimal taxation
  • Preference heterogeneity
  • Saving

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