Abstract :
Capitaltaxationwhichisnegativelycorrelatedwithlaborsupplyisproposed.Thispaper
usesalife-cyclemodelofheterogeneousagentsthatfaceidiosyncraticproductivity
shocks andshowsthatthetaxschemeprovidesastrongworkincentivewhen
householdspossesslargeassetsandhighproductivitylaterinthelife-cycle,whenthey
otherwisewouldworkless.Thesystemalsoaddstothesavingmotiveofprime-age
householdsandraisesaggregatecapital.Theincreasedeconomicactivitiesexpandthe
tax baseandtherevenueneutralreformresultsinaloweraveragetaxrate.Thenegative
cross-dependencegeneratesasizablewelfaregaininthelong-runrelativetothetax
systemthattreatslaborandcapitalincomeseparatelyasataxbase.Thereform,
however,canhurttheelderlyduringthetransitionwithahighmarginaltaxontheir
capitalincome.
