NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Income Taxes with Heterogeneous Discount Rates

Peter A. Diamond, Johannes Spinnewijn

NBER Working Paper No. 15115
Issued in June 2009
NBER Program(s):   PE

With heterogeneity in both skills and discount factors, the Atkinson-Stiglitz theorem that savings should not be taxed does not hold. We consider a model with heterogeneity of preferences at each earnings level. With some assumptions on the equilibrium, a small savings tax on high earners and a small savings subsidy on low earners both increase welfare, regardless of the correlation between ability and discount factor. Key is that types who value future consumption less are more tempted to switch to a lower paid job. Extending Saez (2002), a uniform savings tax increases welfare if the correlation of skill with discount factor is su¢ ciently high. Some optimal tax results and empirical evidence to support the assumptions are presented.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w15115

Published: Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.

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