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Optimal Savings Taxation when Individuals have Different CRRA Utility Functions

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  • Alan Krause

Abstract

Recent empirical research has found that high-skill individuals tend to be less risk averse than low-skill individuals, which implies that their respective constant relative risk aversion (CRRA) utility functions have different curvature. This paper examines the effects of this form of preference heterogeneity on the classic question of whether taxing savings is desirable when the government also implements optimal nonlinear income taxation. It is shown that taxing or subsidising savings may be optimal, even if labour is separable from consumption in the utility function. Specifically, if the individuals' discount rate is lower (resp. higher) than the market interest rate, it is optimal to tax (resp. subsidise) savings. If the individuals' discount rate is equal to the market interest rate, zero taxation of savings is optimal. This basic relationship holds under both linear and nonlinear taxation of savings.

Suggested Citation

  • Alan Krause, 2012. "Optimal Savings Taxation when Individuals have Different CRRA Utility Functions," Discussion Papers 12/13, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:12/13
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    References listed on IDEAS

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    Cited by:

    1. Jang-Ting Guo & Alan Krause, 2018. "Changing social preferences and optimal redistributive taxation," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 73-92.
    2. Soriano-Morales, Y. V. & Vallejo-Jiménez, Benjamín & Venegas-Martínez, Francisco, 2017. "Impact of the degree of relative risk aversion, the interest rate and the exchange rate depreciation on economic welfare in a small open economy," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 13(25), pages 7-24, Primer se.

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    More about this item

    Keywords

    Savings taxation; nonlinear income taxation; preference heterogeneity.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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