Optimal Income Taxation with a Risky Asset – The Triple Income Tax

No 1834, CESifo Working Paper Series from CESifo

Abstract: We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.

Keywords: optimal taxation; uncertainty; consumption tax; triple income tax (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-pbe and nep-pub
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Working Paper: Optimal Income Taxation with a Risky Asset: The Triple Income Tax (2003)
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