Optimal Income Taxation with a Risky Asset: The Triple Income Tax

Research, Preprint English OPEN
Schindler, Dirk (2003)
  • Publisher: Norwegian School of Economics and Business Administration. Department of Economics
  • Journal: (issn: 0804-6824)
  • 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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