Download or read book Capital Income Taxes with Heterogenous Discount Rates written by Peter A. Diamond and published by . This book was released on 2009 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: With heterogeneity in both skills and preferences for the future, the Atkinson-Stiglitz result that savings should not be taxed with optimal taxation of earnings does not hold. On average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to a lower earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. However, introducing a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is sufficiently high. There are also some results on optimal linear taxes that parallel the results on introducing small taxes.