Optimal income taxation with a risky asset: the triple income tax

Research, Preprint English OPEN
Schindler, Dirk (2006)
  • Publisher: Munich: Center for Economic Studies and Ifo Institute (CESifo)
  • Subject: triple income tax | Optimal Taxation, Uncertainty, Consumption Tax, Triple Income Tax | Einkommensteuerpolitik | H21 | Ausgabensteuer | uncertainty | optimal taxation | Optimale Besteuerung | Risiko | consumption tax | Theorie
    • jel: jel:H21
      ddc: ddc:330

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.
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