Applied Economics Workshop
نویسندگان
چکیده
We analytically and quantitatively examine a prominent justi cation for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and show that a relationship between ability and preferences over goods provides a novel reason for sophisticated distortionary commodity taxation. For a two-type economy, we show that optimal relative marginal commodity taxes on a good preferred by high ability individuals are regressive: i.e., declining with income. For an economy with a continuum of types, we derive and explain an analytical expression for optimal commodity taxation, showing how preference variation allows for better screening of ability types. We then calibrate the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.
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