Optimal taxation of normal and excess returns to risky assets

Robin Boadway, Kevin Spiritus*

*Corresponding author for this work

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We examine optimal linear taxes on normal and excess capital income with heterogeneous rates of return, alongside an optimal nonlinear earnings tax. Households optimize a portfolio containing three types of assets: risk-free, diversifiable risky, and private investment with idiosyncratic risk and heterogeneous expected returns. We define normal capital income as the risk-free rate times the size of the portfolio, and excess returns as any deviations from it. In this setting, taxing excess returns is ineffective for redistribution due to a Domar–Musgrave effect and only generates revenue, to be balanced against the cost of revenue uncertainty. Taxing normal returns does serve redistribution, as they reveal information about the investors' types beyond what the earnings tax base reveals.

Original languageEnglish
JournalScandinavian Journal of Economics
Publication statusPublished - 15 May 2024

Bibliographical note

Publisher Copyright:
© 2024 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of Föreningen för utgivande av the SJE.


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