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WHY ARE CAPITAL INCOME TAXES SO HIGH?

Published online by Cambridge University Press:  01 June 2009

Martin Floden
Martin Floden*
Affiliation:
Stockholm School of Economics and CEPR
*
Address correspondence to: Martin Floden, Department of Economics, Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden; e-mail: martin.floden@hhs.se.
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Abstract

The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded by higher taxes on labor income, whereas households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto-improving reforms typically exist, but the welfare gains of such reforms are modest.

Keywords

Optimal TaxationInequalityRedistribution
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 279 - 304
Copyright
Copyright © Cambridge University Press 2009

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