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Capital income taxes with heterogeneous discount rates

Diamond, Peter and Spinnewijn, Johannes (2011) Capital income taxes with heterogeneous discount rates. American Economic Journal: Economic Policy, 3 (4). pp. 52-76. ISSN 1945-7731

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Identification Number: 10.1257/pol.3.4.52


With heterogeneity in both skills and discount factors, the Atkinson- Stiglitz theorem that savings should not be taxed does not hold. In a model with heterogeneity of preferences at each earnings level, introducing a savings tax on high earners or a savings subsidy on low earners increases welfare, regardless of the correlation between ability and discount factor. Extending Emmanuel Saez (2002), a uniform savings tax increases welfare if that correlation is sufficiently high. Key for the results is that types who value future consumption less are more tempted by a lower paid job. Some optimal tax results and empirical evidence are presented.

Item Type: Article
Official URL:
Additional Information: © 2011 American Economic Association
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies
Date Deposited: 23 Feb 2012 15:00
Last Modified: 18 Jun 2024 07:15

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