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Capital taxation: A survey of the evidence

2020-11-09 Vox EU

Daniel Waldenström, IFN, and Spencer Bastani, affiliated to IFN, write about capital taxation in Vox EU.

"The research on optimal capital taxation has undergone large changes. For a long time, the conventional wisdom was that capital income should not be taxed, mainly due to the influential studies of Atkinson and Stiglitz (1976), Judd (1985), and Chamley (1986). These studies emphasised the costly distortions imposed by capital income taxation on individual savings decisions. In the last decades, however, several notable contributions have challenged these studies, noting that such distortions can be useful to counter other distortions, or to promote equity objectives.  

The main argument for taxing capital income, and capital more generally, in this new generation of studies, is that labour income taxation can be a blunt instrument for redistribution when there is substantial heterogeneity in wealth and capital income among individuals with the same labour income. Such heterogeneity arises when one, realistically, assumes that taxpayers differ not only in terms of their labour earning ability (as emphasised by the traditional literature), but also in terms of other characteristics, such as inheritances received, their achievable rates of return on their investments, and their preferences for saving. The combination of labour and capital taxes is therefore able to achieve potentially more efficient redistribution than if labour income were taxed alone. "

Read the article here

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