Capital Income Taxes with Heterogeneous Discount Rates

Diamond, Peter; Spinnewijn, Johannes

doi:10.2139/ssrn.1434182

Cited by 36 publications

(50 citation statements)

References 24 publications

(27 reference statements)

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“…Two or more dimensions introduce a multiple screening problem for which a tractable analytical approach at this level of generality has not been developed. 11 Later, we will parameterize the in ‡uence of ability on preferences with the function w i where…”

Section: Modelmentioning

confidence: 99%

Preference Heterogeneity and Optimal Capital Income Taxation

Golosov

Troshkin

Tsyvinski³

et al. 2010

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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, optimal capital income tax rates rise to 15% on average and 23% on high earners; if the intertemporal elasticity is two, 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.

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Section: Modelmentioning

confidence: 99%

Preference Heterogeneity and Optimal Capital Income Taxation

Golosov

Troshkin

Tsyvinski³

et al. 2010

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“…In particular, to what degree should any of the underlying dierences across individuals in addition to dierences in earnings ability aect the ideal tax base? The analysis in the rest of this paper follows the past literature in presuming that the ideal tax is an ability" tax, but this 3 This could be the case, for example, if those with high ability tend to discount future utility less severely, a possibility focused on in Diamond and Spinnewijn (2010).2 section at least highlights questions that might be raised about this characterization of the ideal tax.Section 2 provides some preliminary empirical evidence on the extent to which observable information in addition to own labor income helps forecast an individual's earnings ability, as measured by the wage rate, using data from the PSID.Section 3 then generalizes the standard optimal tax model to allow for multiple sources of information about the individual, and derives expressions characterizing the optimal tax base. Section 4 makes use of these expressions and the PSID data rst to test whether the existing tax base makes optimal use of available information and then to approximate the tax base that would be most attractive on equity grounds.…”

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confidence: 99%

The Choice of the Personal Income Tax Base

Gordon

Kopczuk

2014

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Starting with Mirrlees (1971) and Vickrey (1945), the optimal tax literature has studied the design of a personal income tax. The ideal would be to tax earnings ability. Earnings ability is unobservable for tax purposes, however, and past papers have focused instead on designing a tax on labor income. Existing tax bases, though, depend on a broader range of information about each individual. In principle, this supplementary information can help in designing a tax that has more attractive distributional properties, by more closely approximating an ability tax. The objective of this paper is to lay out theoretically and estimate empirically how to make best use of available information about each individual in addition to earnings, when constructing a tax base that is most attractive on distributional grounds.To begin with, we find that the current tax base does slightly less well than the far simpler tax base equal just to a couple's joint earnings. In accordance with current practice, we find that the optimal tax base should include capital income, at least to some degree. In contrast to current practice, property tax payments and mortgage interest payments should not be deductible, since these deductions are costly on equity and presumably on efficiency grounds. We also find that joint filing and separate filing by a couple have similar consequences on equity grounds. Public Economics ProgrammeThe Public Economics Programme was established in 2009. It is located within the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) at the London School of Economics and Political Science. The programme is directed by Frank Cowell and Henrik Kleven. The Discussion Paper series is available free of charge. To subscribe to the PEP paper series, or for further information on the work of the Programme, please contact our Research Secretary, Leila Alberici on:Telephone: UK+20 7955 6674 Fax:UK+20 7955 6951 Email:l.alberici@lse.ac.uk Web site: http://sticerd.lse.ac.uk/PEP © Authors: Roger H. Gordon and Wojciech Kopczuk . All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.The choice of a personal income tax consists rst of the choice of a tax base and then the choice of a tax rate schedule. The past literature on the optimal design of the income tax, as exemplied by Vickrey (1945) and Mirrlees (1971), 1 presumes that the ideal tax base is the earnings ability (wage rate) of each individual, since this is the only characteristic that is assumed to dier across people. In practice, however, earnings ability cannot be monitored for tax purposes. A close observable proxy for earnings ability is labor income (wage rate times hours of work), so that the initial optimal tax literature presumed that labor income is the natural choice of a tax base and then derived the optimal rate schedule given this tax base.Are there any welfare gains, though, from including...

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“…• discount rates decrease with earning ability (Mirrlees 1976;Saez 2002;Diamond and Spinnewijn 2011) • initial assets or bequests typically increase with earning ability (Cremer, Pestieau, and Rochet 2001;Piketty and Saez 2013) • asset returns increase with earning ability (Gerritsen and others 2017) • assets or bequests increase with positive shocks in earning ability (Jacobs and Schindler 2012).…”

Section: Optimal Taxation Of Capital Incomementioning

confidence: 99%

“…To see how jointness in tax systems can be desirable, consider the following simple example, inspired by Diamond and Spinnewijn (2011). Suppose that labor income is taxed and capital income is not.…”

Section: Jointness In Tax Systemsmentioning

confidence: 99%

Digital Revolutions in Public Finance

2017

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Capital Income Taxes with Heterogeneous Discount Rates

Cited by 36 publications

References 24 publications

Preference Heterogeneity and Optimal Capital Income Taxation

Preference Heterogeneity and Optimal Capital Income Taxation

The Choice of the Personal Income Tax Base

Digital Revolutions in Public Finance

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