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Optimal Capital Income Taxation with Means‐tested Benefits
Author(s) -
Kumru Cagri S.,
Piggott John
Publication year - 2017
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12130
Subject(s) - economics , capital income , labour economics , optimal tax , capital (architecture) , tax revenue , welfare , monetary economics , tax rate , income tax , microeconomics , international taxation , tax reform , public economics , market economy , archaeology , history
This paper studies the interaction between capital income taxation and a means‐tested age pension. Our results document that the existence of a social insurance program financed from general revenue puts an upward pressure on the optimal tax rate. We also show that there is a negative relation between taper (benefit‐reduction) and optimal capital income tax rates. The potential welfare gain from optimizing capital taxation in the presence of a universal retirement transfer system is relatively higher. However, when the transfer is substantially means tested, the gain is lower, because the means test effectively operates as a tax on retirement capital.