On Income and Wealth Taxation in a Life‐Cycle Model with Extensive Labour Supply

Abstract

In a stationary life-cycle model with extensive labour supply, two forms of taxation are studied: non-linear income taxation and linear wealth taxation. In the life-cycle model, the social weights of the dynasties depend on their permanent incomes, not on the observed taxable current income. A tax on wealth then can complement income tax as a redistributive tool. The derivative of social welfare with respect to the wealth tax rate at the no-tax point is computed. It is positive whenever permanent income is positively correlated with aggregate life time savings. This result is illustrated on a numerical example.