Working Paper: NBER ID: w15115
Authors: Peter A. Diamond; Johannes Spinnewijn
Abstract: With heterogeneity in both skills and discount factors, the Atkinson-Stiglitz theorem that savings should not be taxed does not hold. We consider a model with heterogeneity of preferences at each earnings level. With some assumptions on the equilibrium, a small savings tax on high earners and a small savings subsidy on low earners both increase welfare, regardless of the correlation between ability and discount factor. Key is that types who value future consumption less are more tempted to switch to a lower paid job. Extending Saez (2002), a uniform savings tax increases welfare if the correlation of skill with discount factor is su¢ ciently high. Some optimal tax results and empirical evidence to support the assumptions are presented.
Keywords: capital income taxation; heterogeneous discount rates; welfare implications
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| small tax on savings for high earners (D14) | increase welfare (I38) |
| subsidy for low earners (H23) | increase welfare (I38) |
| uniform savings tax (H29) | increase welfare (I38) |
| correlation of skill with discount factor (D15) | increase welfare (I38) |
| savings taxation on high earners (H26) | ease binding incentive compatibility constraints (D10) |
| preferences for savings (D14) | labor market outcomes (J48) |