Social versus Individual Discount Factor: Taxing or Subsidizing Savings?

• In Event: Optimal Capital and Firm Taxation

Abstract

The Atkinson and Stiglitz (1976) theorem suggests that savings should be neither taxed nor subsidized. However, in practice, taxes or subsidies on savings are widely used by governments worldwide for redistributive purposes. In this paper, we extend a benchmark model to allow for differences in social and individual discount factors, while preserving the assumption that individuals are rational. We show that whether savings should be taxed or subsidized depends critically on these differences. Our analysis suggests that adopting a non-welfarist social welfare function (SWF) would lead to the breakdown of the Atkinson-Stiglitz theorem.

Author

• Zhiyong An, anzy2008@gmail.com