On the Desirability of Taxing Capital Income in Optimal Social Insurance
نویسندگان
چکیده
This paper analyzes optimal linear taxes on labor income and savings in a twoperiod life-cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since secondperiod labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair. JEL classification: H21, D80
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