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First-best optimality in capital income taxation

Hilgers, Bodo; Schindler, Dirk
Working paper
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URI
http://hdl.handle.net/11250/162888
Date
2004-10
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  • Discussion papers (SAM) [676]
Abstract
In case of risk, especially aggregate risk which cannot be insured, the literature

states that for achieving first-best optimality state-dependent lumpsum

taxes are absolutely necessary. However, we show in a two-asset portfolio

choice model that a suitably designed capital income tax can ensure

a first-best solution without using state-dependent lump-sum taxes. Therefore,

taxation must not focus on the single assets’ returns but on the prices

of commodities, embedded in these assets. Hence, our tax system uses the

prices for resource shifting into the future and for incurring risk as tax bases.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2004:26

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