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…

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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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3 Responses to Six Reasons to Study Capital Taxation

  1. ZeroInMyOnes says:

    Found this via Mark Thoma. Thank you for advancing the conversation on this topic. As a lay person I ask, wouldn’t labor income accumulation also be correlated with growth, as it would increase a family’s ability to consume and invest?

  2. Alan T. says:

    Does capital income benefit society?

    Suppose I buy some previously existing shares of corporate stock, and then sell them a year and a day later at a profit. I have done nothing to benefit the corporation. I have done nothing to benefit society. I have profited from the employees of the corporation whose efforts made my stock more valuable. Not only does society fail to regard my profit as theft, but it taxes it at a lower rate than the money I earn by the sweat of my brow.

    I have just invested in a startup company, so I recognize that companies sometimes need equity investments, and that investors need a market to eventually sell their shares into in order to have an incentive to invest.

    Would it make sense to restrict by law the ability to buy existing shares of corporate stock so that only employees of the corporation or non-profit institutions that benefit society could purchase the stock? This would eliminate the scenario I described above in which I can make investment profits without benefiting society in any way.

  3. amit says:


    i really appreciate your thought ! social capital has gained significant ground as a means of enhancing overall quality and effectiveness

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