Capital Income Taxes with Heterogeneous Discount Rates
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.
Published Versions
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. citation courtesy of 
Related
Topics
Programs
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
