Thursday, 17 February 2011

Recent Publication by Johannes Spinnewijn: Capital Income Taxes with Heterogeneous Discount Rates

The paper (joint with Peter Diamond) is forthcoming in AEJ: Economic Policy

Abstract: 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 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.

The paper can be found here