Taxing risky capital income - A commodity taxation approach

In a two-period world with endogenous savings and two assets, the optimal tax structure and optimal diversification of aggregate (capital) risk between private and public consumption are analyzed. We show that there is no trade-off between efficiency in intertemporal consumption and allocation of risk; both goals are reached as long as labor supply is exogenous. This requires, however, taxing the excess return at a special tax rate. Optimally extending the dual income tax for risky capital income, accordingly, leads to a tax system with three tax bases: the triple income tax.