On the desirability of taxing capital income in optimal social insurance

Bas Jacobs*, Dirk Schindler

*Corresponding author for this work

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10 Citations (Scopus)
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Abstract

This paper analyzes optimal linear taxes on labor income and savings in a two-period life-cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair.

Original languageEnglish
Pages (from-to)853-868
Number of pages16
JournalJournal of Public Economics
Volume96
Issue number9-10
DOIs
Publication statusPublished - Oct 2012

Bibliographical note

Funding Information:
This paper has benefited from comments by Tomer Blumkin, Robin Boadway, Friedrich Breyer, Helmuth Cremer, Wolfgang Eggert, Hans Fehr, Andreas Haufler, Laurence Jacquet, Pierre Pestieau, Dominik Sachs, Agnar Sandmo, and two anonymous referees, as well as participants of seminars and conferences in Munich, Istanbul, Konstanz, and Uppsala. Major parts of the paper have been written during a research stay of both authors at the Norwegian School of Economics in Bergen. Schindler also visited the Erasmus School of Economics in Rotterdam and the Center of Economic Studies in Munich. The hospitality and support of all these institutions are cordially acknowledged. Bas Jacobs is grateful to the Dutch Organization for Sciences for financial support (Vidi Grant No. 452-07-013 , ‘Skill Formation in Distorted Labor Markets’). Dirk Schindler gratefully acknowledges support by the Fritz-Thyssen-Stiftung .

Research programs

  • EUR ESE 37

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