November 22, 2022
Abstract
This paper reviews recent developments in the theory and practice of optimal capital taxation. We emphasize three main rationales for capital taxation. First, the frontier between capital and labor income flows is often fuzzy, thereby lending support to a broad- based, comprehensive income tax. Next, the very notions of income and consumption flows are difficult to define and measure for top wealth holders where capital gains due to asset price e ffects dwarf ordinary income and consumption flows. Therefore the proper way to tax billionaires is a progressive wealth tax. Finally, as individuals cannot choose their parents, there are strong meritocratic reasons why we should tax inherited wealth more than earned income or self-made wealth for which individuals can be held responsible, at least in part. This implies that the ideal fiscal system should also include a progressive inheritance tax, in addition to progressive income and wealth taxes. We then confront our prescriptions with historical experience. Although there are signicant di erences, we argue that observed fiscal systems in modern democracies bear important similarities with this ideal tryptic.
Keywords: optimal capital taxation, wealth taxation, inheritance taxation
Thomas Piketty: Paris School of Economics, Paris, France, e-mail: piketty@pse.ens.fr; Emmanuel Saez: Department of Economics, University of California Berkeley, United States, e-mail: saez@econ.berkeley.edu; Gabriel Zucman: Department of Economics, University of California Berkeley, United States, e-mail: zuc- man@berkeley.edu. This draft has been prepared for the Oxford Review of Economic Policy special issue Taxing the Rich (More). We thank Joel Slemrod and conference participants for helpful comments and discussions.
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