On taxing capital income with income shifting

Authors: Vidar Christiansen Matti Tuomala

Publish Date: 2008/05/16

Volume: 15, Issue: 4, Pages: 527-545

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Abstract

We examine a linear capital income tax and a nonlinear labor income tax in a twotype model where individuals live for two periods We assume that taxes are paid only in the second period in which the agents receive both labor and capital income and may shift income from labor to capital The two types of individuals may differ with respect to wage rate and initial resource endowments In the absence of income shifting endowment variation motivates a capital income tax which would not exist where there is pure wage rate variation In the latter circumstance income shifting would indeed establish a case for a capital income tax while adding variation in resource endowments would ambiguously affect the case The asymmetric information case for a capital income tax must be traded off against distortionary effects not only on savings but also on labor as an agent may earn labor income which is reported and taxed as capital income

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