A Theory of Optimal Capital Taxation

110 Pages Posted: 25 May 2012

See all articles by Thomas Piketty

Thomas Piketty

Paris School of Economics (PSE)

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2012

Abstract

This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous random tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. The long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic parameters, the optimal tax rate on capitalized inheritance should be as high as 50%-60% - or even higher for top wealth holders - if the government has meritocratic preferences (i.e., puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, bequest taxation remains desirable in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique determinant of lifetime resources. In contrast to Chamley-Judd, positive capital taxation is desirable because our preferences allow for finite long run elasticities of inheritance to tax rates. Finally, we discuss how capital market imperfections and uninsurable shocks to rates of return can justify shifting one-off inheritance taxation toward lifetime capital taxation, and can account for the actual structure and mix of inheritance and capital taxation.

Keywords: optimal taxation

JEL Classification: H100

Suggested Citation

Piketty, Thomas and Saez, Emmanuel, A Theory of Optimal Capital Taxation (April 2012). CEPR Discussion Paper No. DP8946, Available at SSRN: https://ssrn.com/abstract=2066319

Thomas Piketty (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Emmanuel Saez

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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