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Optimal Taxation of Capital Income with Heterogeneous Rates of Return

Author

Listed:
  • Aart Gerritsen

    (Erasmus University Rotterdam)

  • Bas Jacobs

    (Erasmus University Rotterdam)

  • Alexandra V. Rusu

    (European Commission)

  • Kevin Spiritus

    (Erasmus University Rotterdam)

Abstract
There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.

Suggested Citation

  • Aart Gerritsen & Bas Jacobs & Alexandra V. Rusu & Kevin Spiritus, 2020. "Optimal Taxation of Capital Income with Heterogeneous Rates of Return," Tinbergen Institute Discussion Papers 20-038/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20200038
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    References listed on IDEAS

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    Cited by:

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    2. Hellwig, Christian & Werquin, Nicolas, 2022. "Using Consumption Data to Derive Optimal Income and Capital Tax Rates," TSE Working Papers 22-1284, Toulouse School of Economics (TSE), revised Jul 2024.
    3. Spiritus, Kevin & Lehmann, Etienne & Renes, Sander & Zoutman, Floris T., 0. "Optimal taxation with multiple incomes and types," Theoretical Economics, Econometric Society.
    4. Karl Schulz, 2021. "Redistribution of Return Inequality," CESifo Working Paper Series 8996, CESifo.
    5. Eddy Zanoutene, 2023. "Scale‐dependent and risky returns to savings: Consequences for optimal capital taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(3), pages 532-569, June.
    6. Florian Scheuer & Joel Slemrod, 2021. "Taxing Our Wealth," Journal of Economic Perspectives, American Economic Association, vol. 35(1), pages 207-230, Winter.
    7. Antoine Ferey & Benjamin B. Lockwood & Dmitry Taubinsky, 2024. "Sufficient Statistics for Nonlinear Tax Systems with General Across-Income Heterogeneity," American Economic Review, American Economic Association, vol. 114(10), pages 3206-3249, October.
    8. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    9. Robin Boadway & Kevin Spiritus, 2021. "Optimal Taxation of Normal and Excess Returns to Risky Assets," Tinbergen Institute Discussion Papers 21-025/VI, Tinbergen Institute.
    10. Csaba Lentner & Szilárd Hegedűs & Vitéz Nagy, 2022. "Correlations of Taxation and Macroeconomic Indicators in the OECD Member Countries from 2014 to the First Year of the Crisis Caused by COVID-19," JRFM, MDPI, vol. 15(10), pages 1-17, October.
    11. Sarah Perret, 2021. "Why were most wealth taxes abandoned and is this time different?," Fiscal Studies, John Wiley & Sons, vol. 42(3-4), pages 539-563, September.
    12. Pierre-Edouard Collignon, 2021. "No Regret Fiscal Reforms," Working Papers 2021-20, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    Optimal taxation; capital taxation; heterogeneous returns;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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