Working Paper: NBER ID: w16619
Authors: Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski; Matthew Weinzierl
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, 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.
Keywords: capital income taxation; preference heterogeneity; optimal taxation
JEL Codes: E62; H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital income taxation (H24) | Taxation of goods preferred by high-ability individuals (H29) |
| Taxation of goods preferred by high-ability individuals (H29) | Increased efficiency in redistributive taxation (H21) |
| Intertemporal elasticity of substitution (D15) | Optimal capital income tax rates (H21) |
| Optimal capital income tax rates (H21) | Welfare gains from optimal capital taxation (H21) |