Must-Read: Emmanuel Saez and Stefanie Stantcheva: A Simpler Theory of Optimal Capital Taxation

Must-Read: I have long thought that the right way to think about consumption vs. income taxes is that a consumption tax is like a labor income tax plus a one-time credibly-unrepeated initial capital levy. Since it taxes something in completely inelastic supply–the initial capital stock–that escapes income taxation, it has to be more “efficient” than an income tax. This has tended to make me a friend of progressive consumption taxes. But here we have Saez and Stantcheva making a powerful argument that we need capital taxation as well. I am going to have to think hard about this:

Emmanuel Saez and Stefanie Stantcheva: A Simpler Theory of Optimal Capital Taxation:

We derive formulas for optimal linear and nonlinear capital income taxation…

…expressed in terms of the elasticity of the supply of capital income… the shape of the capital income distribution, and the social welfare weights at each capital income level…. The social welfare criterion required to justify a pure labor tax (or equivalently a pure consumption tax) is that all inequalities in capital are fair, which is a very strong requirement…. If differences in capital are considered fully fair (i.e., the generalized social welfare weights are uncorrelated with capital and capital is not a tag) the optimal capital tax is zero…. Because capital income is much more concentrated than labor income, we find that the top tax rate on capital income should be higher than the top tax rate on labor income…