TY - JOUR
AU - Saez,Emmanuel
TI - Optimal Progressive Capital Income Taxes in the Infinite Horizon Model
JF - National Bureau of Economic Research Working Paper Series
VL - No. 9046
PY - 2002
Y2 - July 2002
DO - 10.3386/w9046
UR - http://www.nber.org/papers/w9046
L1 - http://www.nber.org/papers/w9046.pdf
N1 - Author contact info:
Emmanuel Saez
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720
Tel: 510/642-4631
Fax: 510/642-6615
E-Mail: saez@econ.berkeley.edu
AB - This paper analyzes optimal progressive capital income taxation in an infinite horizon model where individuals differ only through their initial wealth. We show that, in that context, progressive taxation is a much more powerful and efficient tool to redistribute wealth than linear taxation on which previous literature has focused. We consider progressive capital income tax schedules taking a simple two-bracket form with an exemption bracket at the bottom and a single marginal tax rate above a time varying exemption threshold. Individuals are taxed until their wealth is reduced down to the exemption threshold. When the intertemportal elasticity of substitution is not too large and the top tail of the initial wealth distribution is infinite and thick enough, the optimal exemption threshold converges to a finite limit. As a result, the optimal tax system drives all the large fortunes down a finite level and produces a truncated long-run wealth distribution. A number of numerical simulations illustrate the theoretical result.
ER -