Each Monday I peruse the latest working papers in my profession. Here is this morning’s treat:

A Theory of Optimal Capital Taxation

by Thomas Piketty, Emmanuel Saez – #17989 (PE)Abstract:

This paper develops a realistic, tractable theoretical model that can

be used to investigate socially-optimal capital taxation. We present

a dynamic model of savings and bequests with heterogeneous random

tastes for bequests to children and for wealth per se. We derive

formulas for optimal tax rates on capitalized inheritance expressed

in terms of estimable parameters and social preferences. Under our

model assumptions, the long-run optimal tax rate increases with the

aggregate steady-state flow of inheritances to output, decreases with

the elasticity of bequests to the net-of-tax rate, and decreases with

the strength of preferences for leaving bequests. For realistic

parameters of our model, the optimal tax rate on capitalized

inheritance would be as high as 50%-60%-or even higher for top wealth

holders-if the social objective is meritocratic (i.e., the social

planner puts higher welfare weights on those receiving little

inheritance) and if capital is highly concentrated (as it is in the

real world). In contrast to the Atkinson-Stiglitz result, the

optimal tax on bequest remains positive in our model even with

optimal labor taxation because inequality is two-dimensional: with

inheritances, labor income is no longer the unique determinant of

lifetime resources. In contrast to Chamley-Judd, the optimal tax on

capital is positive in our model because we have finite long run

elasticities of inheritance to tax rates. Finally, we discuss how

adding capital market imperfections and uninsurable shocks to rates

of return to our optimal tax model leads to shifting one-off

inheritance taxation toward lifetime capital taxation, and can

account for the actual structure and mix of inheritance and capital

taxation.

When you hear the term “optimal” I suggest you run for the hills.

“Optimal” for whom?

That abstract should be tattooed on the backs of Thomas Piketty and Emmanuel Saez.

“(i.e., the social planner puts higher welfare weights on those receiving little inheritance) ”

So, if you want to give money to B at the expense of A, the optimal tax system is one which takes money from A? How fascinating!

The quotation is a good reason for why people talk around each other; one needs a big piece of paper to diagram that piece to get to the impeneratible point. As writing, I give it an F, or if we grade numerically, a .375, credit for completing sentences, an optimal grade for bullshit. Sorry, but there is only one word for it.

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