The Role of Preference Heterogeneity in Optimal Capital Taxation


This project will extend the prevailing framework to show how to compute the optimal capital income tax when the Atkinson–Stiglitz conditions fail. Specifically, we show how to estimate a key sufficient statistic for between-income preference heterogeneity which governs optimal capital tax rates. When this statistic happens to be zero, the Atkinson–Stiglitz result obtains, but more generally, this statistic allows for the calculation of the optimal non-zero capital income tax. We implement this empirical strategy using data from a microsimulation model, and we perform numerical simulations to compute the optimal capital income tax after accounting for between-income preference heterogeneity.

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Award Dates: 
July 1, 2020 - June 30, 2021