Working Paper: NBER ID: w9046
Authors: Emmanuel Saez
Abstract: This paper analyzes optimal progressive capital income taxation in an infinite horizon model where individuals differ only through their initial wealth. We show that, in that context, progressive taxation is a much more powerful and efficient tool to redistribute wealth than linear taxation on which previous literature has focused. We consider progressive capital income tax schedules taking a simple two-bracket form with an exemption bracket at the bottom and a single marginal tax rate above a time varying exemption threshold. Individuals are taxed until their wealth is reduced down to the exemption threshold. When the intertemportal elasticity of substitution is not too large and the top tail of the initial wealth distribution is infinite and thick enough, the optimal exemption threshold converges to a finite limit. As a result, the optimal tax system drives all the large fortunes down a finite level and produces a truncated long-run wealth distribution. A number of numerical simulations illustrate the theoretical result.
Keywords: No keywords provided
JEL Codes: H21; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| progressive capital income taxation (F38) | wealth redistribution (H23) |
| progressive capital income taxation (F38) | long-run wealth distribution (D30) |
| progressive taxation (H29) | net-of-tax rate of return for large wealth holders (H24) |
| progressive taxation (H29) | concentration of capital income (D33) |
| linear taxation (H29) | infinite distortion problem (C62) |