On taxing capital income with income shifting |
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Authors: | Vidar Christiansen Matti Tuomala |
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Institution: | (1) University of Oslo, Oslo, Norway;(2) University of Tampere, Tampere, Finland |
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Abstract: | We examine a linear capital income tax and a nonlinear labor income tax in a two-type 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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Keywords: | Capital taxation Income shifting |
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