On the Desirability of Taxing Capital Income to Reduce Moral Hazard in Social Insurance
39 Pages Posted: 12 Oct 2009
Date Written: September 1, 2009
Abstract
This paper analyzes optimal linear taxes on labor income and savings in a standard two-period life-cycle model with endogenous leisure demands in both periods and non-insurable income risks. Households are subject to skill shocks in both periods of the life-cycle. We allow for completely general skill processes including those with persistence in skill shocks. We demonstrate that capital taxes are optimal since they reduce moral hazard in social insurance in two distinct ways: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes reduce distortions in first-period labor supply by allowing for a lower level of labor taxes, although this effect is partially off-set because first-period labor supply and saving are complements. Capital taxes will be more attractive for social insurance if a larger part of risk is realized in the first period of the life-cycle. Our results suggest that taxing (retirement) saving is optimal to boost the retirement age and to reduce the tax-burden on working-age individuals.
Keywords: optimal capital taxation, risk, Atkinson-Stiglitz theorem
JEL Classification: H21, D80
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Preference Heterogeneity and Optimal Capital Income Taxation
By Mikhail Golosov, Maxim Troshkin, ...
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Optimal Taxation of Entrepreneurial Capital with Private Information
-
Designing Optimal Disability Insurance: A Case for Asset Testing
By Mikhail Golosov and Aleh Tsyvinski
-
Optimal Taxation with Endogenous Insurance Markets
By Mikhail Golosov and Aleh Tsyvinski
-
Inequality, Social Discounting, and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Inequality, Social Discounting and Estate Taxation
By Emmanuel Farhi and Iván Werning
-
Dynamic Mechanism Design with Hidden Income and Hidden Actions: Technical Appendix
-
Dynamic Contracting with Persistent Shocks
By Yuzhe Zhang