Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) LSE RSS Contact Us YouTube Twitter


Public Economics Programme Discussion Paper
Preference Heterogeneity and Optimal Capital Taxation
Mikhail Golosov, Aleh Tsyvinsky and Matthew Weinzierl
June 2010
Paper No' PEP 07:
Full Paper (pdf)

We analytically and quantitatively examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.