Optimal taxation of capital income with heterogeneous rates of return Aart Gerritsen, Bas Jacobs, Kevin Spiritus and Alexandra V. Rusu
By: Gerritsen, Aart
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Contributor(s): Jacobs, Bas | Spiritus, Kevin | Rusu, Alexandra V.
Material type: 
ArticleSubject(s): IMPUESTO SOBRE LA RENTA DE LAS PERSONAS FISICAS | IMPUESTO SOBRE SUCESIONES Y DONACIONES | SUBVENCIONES PUBLICAS | EFICIENCIA
In:
The Economic Journal v. 135, n. 665, January 2024, p. 180-211Summary: We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier individuals enjoy scale effects in wealth accumulation. In both cases, a strictly positive tax on capital income is part of any Pareto-efficient tax system. We derive a condition for the Pareto-efficient tax mix that relies solely on empirical sufficient statistics—not on social welfare weights—and find that Pareto-efficient taxes on capital income increase with the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that Pareto-efficient marginal tax rates on capital income are positive and substantial.
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| OP 282/2024/664 The Economic Journal | OP 282/2024/664-1 Using list prices to collude or to compete? | OP 282/2025/665 The Economic Journal | OP 282/2025/665-1 Optimal taxation of capital income with heterogeneous rates of return | OP 282/2025/667 The Economic Journal | OP 282/2025/667-1 Earnings responses to even higher taxes open access | OP 282/2025/667-2 Trade and domestic policies under monopolistic competition |
Bibliografía
We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier individuals enjoy scale effects in wealth accumulation. In both cases, a strictly positive tax on capital income is part of any Pareto-efficient tax system. We derive a condition for the Pareto-efficient tax mix that relies solely on empirical sufficient statistics—not on social welfare weights—and find that Pareto-efficient taxes on capital income increase with the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that Pareto-efficient marginal tax rates on capital income are positive and substantial.
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