Public Economics Lectures Part 1: Introduction

Atkinson-Stiglitz: Implications for Capital Taxation
Two period model: wage rate w in period 1, retired in period 2
Let δ = discount rate, ψ(.) disutility of effort, and utility
The budget constraint is
u h (c 1 , c 2 , z) = u(c 1 ) + u(c 2)
1 + δ − ψ(z/w)
c 1 + c 2 /(1 + r(1 − t K )) ≤ z − T (z)
Tax on savings t K is equivalent to tax on c 2
Atkinson-Stiglitz implies that tK ∗
income tax
= 0 in the presence of an optimal
Very sharp policy prediction
Public Economics Lectures () Part 4: Optimal Taxation 86 / 121