An equilibrium-conserving taxation scheme for income from capital

TL;DR

This paper proposes a simple, progressive taxation scheme that preserves the Pareto distribution of capital income in equilibrium, with adjustable parameters based on total tax, income threshold, and capital income estimates.

Contribution

It introduces a novel taxation scheme that maintains the equilibrium distribution of capital income while allowing for progressive taxation and parameter derivation from economic data.

Findings

Taxation scheme preserves Pareto distribution post-tax

Parameters can be derived from total tax, threshold, and capital income estimates

Scheme provides a check on declared capital income

Abstract

Under conditions of market equilibrium, the distribution of capital income follows a Pareto power law, with an exponent that characterizes the given equilibrium. Here, a simple taxation scheme is proposed such that the post-tax capital income distribution remains an equilibrium distribution, albeit with a different exponent. This taxation scheme is shown to be progressive, and its parameters can be simply derived from (i) the total amount of tax that will be levied, (ii) the threshold selected above which capital income will be taxed and (iii) the total amount of capital income. The latter can be obtained either by using Piketty's estimates of the capital/labor income ratio or by fitting the initial Pareto exponent. Both ways moreover provide a check on the amount of declared income from capital.