Abstract:
We examine optimal labour and capital income taxation when individuals can exert investment eort in order to increase the rate of return. We set up a two period model where individuals differ in investment ability and labour market productivity. In the absence of the possibility to exert investment effort, capital income should not be taxed if preferences are separable between leisure and consumption, based on the Atkinson-Stiglitz theorem. The theorem does not hold when individuals can exert investment eort. Our results indicate that capital income should be taxed at the optimum even if preferences are separable between leisure and consumption.
Photo: Yudi Wen