Capital Income Taxation and Estate Taxation

By Matthew Yglesias  |  Posted Sunday, Jan. 29, 2012, at 10:10 AM ET

With the differential tax treatment of investment income and labor income in the news, I thought it would be interesting to highlight some of the academic research on the subject. The standard "classic" result in this field is, in fact, that an optimal system would have no taxation of investment income. But there are several strands of research that question some of the premises underlying that analysis. One popular line of inquiry makes what amounts to a political economy argument that if you have hugely differentially taxation of different kinds of income you end up generating more and more shenanigans like the "carried interest" loophole where smartypants rich guys find ways to reclassify labor income as capital income. But Thomas Piketty and Emannuel Saez take a different approach in "A Theory of Optimal Capital Taxation" (PDF) arguing that we should see capital income taxation as a kind of distributed inheretance tax: