Optimal Capital Income Taxation with Means-tested Bene\u85ts

This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK eco-nomy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar e¤ect. We formalize this using a stochastic OLG model with multiple individuals di¤erentiated by labour productivity and pension entitlement. Our preliminary \u85ndings suggest that a means tested pension has e¤ects similar to capital income taxation in a life-cycle context. JEL Classi\u85cation: E21, E62, H5