Six Reasons to Study Capital Taxation

Here are four reasons from Emmanuel Saez:

  1. Capital income is about 25% of national income (labor income is 75%) but distribution of capital income is much more unequal than labor income. Capital income inequality is due to differences in savings behavior but also inheritances received ⇒ Equity suggests it should be taxed more than labor
  2. Capital Accumulation is correlated strongly with growth (although causal link is not obvious) and capital accumulation might be sensitive to the net-of-tax return. ⇒ Efficiency cost of capital taxation might be high.
  3. Capital is more mobile internationally than labor. Incidence is then partly shifted to labor if capital is mobile.
  4. Capital taxation is extremely complex and provides many tax avoidance opportunities

In short, the equity-efficiency tradeoffs are especially stark. I’ll add two other reasons:

5. We also understand it less well than labor income taxation, so the topic deserves more focus and research.

6. The future path of inequality will likely magnify the topic’s importance.

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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2 Responses to Six Reasons to Study Capital Taxation

  1. George N. Wells says:

    Do we not understand capital income, or is it just that we have been persuaded that income that comes from the use of capital is somehow more beneficial to the society than the income from labor? Why should income derived from capital get preferential treatment? Not all capital income comes from venture or IPO investment (only these actually capitalize business) and statutes can be written to give venture and IPO profits a beneficial tax treatment.

    In the end, all income is simply income and none of it actually deserves any form of preferential treatment in a fair society.

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