Abstract: This paper studies the determinants of optimal taxes for wealthy individuals faced with capital income risk. I develop a model of optimal taxation of capital income in which wealth and income inequality is a result of capital income shocks together with frictions in financial markets. I use the model to study optimal taxation of various types of capital income: capital income from controlled businesses, outside the business as well as bequests. In presence of risk-return trade-offs, i.e., when more productive investments are riskier, I show that it is typically optimal to have progressive saving taxes. Furthermore, in an intergenerational context, I show that bequest taxes should be negative. Finally, I study the implications of the model on long run efficient distribution of wealth. I show that the long-run distribution of wealth has a fat-tail distribution and compare the efficient tail of the wealth distribution to the one resulting from an ad-hoc incomplete market model.
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: preprint
Access and Citation
Cited By Count: 9
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot