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Bentham on Taxation

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)


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

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

4 Responses to “Bentham on Taxation”

  1. Speedmaster says:

    “Optimal” for whom?

  2. chuck martel says:

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

  3. cmprostreet says:

    “(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!

  4. Harry says:

    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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