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On the optimality of age-dependent taxes and the progressive U.S. tax system

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  • Gervais, Martin

Abstract

In life-cycle economies, where an individual's optimal consumption-work plan is almost never constant, the optimal marginal tax rates on capital and labor income vary with age. Conversely, the progressivity imbedded in the U.S. tax code implies that marginal tax rates vary with age because tax rates vary with earnings and earnings vary with age. Using numerical simulations, this paper shows that if the tax authority is prevented from conditioning tax rates on age, some degree of progressivity is desirable as progressive taxation better imitates optimal age-dependent taxes than an optimal age-independent tax system. This role for progressive taxation emanates from efficiency reasons and does not rely on any insurance nor re-distribution arguments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 682-691

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:4:p:682-691

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Progressive taxation; Optimal taxation; Life-cycle;

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References

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  9. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
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Cited by:
  1. Kazi Iqbal & Stephen J. Turnovsky, 2008. "Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 27-53, 02.
  2. Sagiri Kitao, 2010. "Labor-dependent Capital Income Taxation That Encourages Work and Saving," 2010 Meeting Papers 271, Society for Economic Dynamics.
  3. Peter Diamond, 2009. "Taxes and Pensions," Working Papers, Center for Retirement Research at Boston College wp2009-12, Center for Retirement Research, revised May 2009.
  4. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.
  5. Mathias Kifmann, 2008. "Age-Dependent Taxation and the Optimal Retirement Benefit Formula," German Economic Review, Verein für Socialpolitik, vol. 9, pages 41-64, 02.
  6. Aspen Gorry & Ezra Oberfield, 2012. "Optimal Taxation Over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 551-572, October.
  7. William B. Peterman, 2011. "Determining the motives for a positive optimal tax on capital," Finance and Economics Discussion Series 2011-55, Board of Governors of the Federal Reserve System (U.S.).
  8. Echevarría, Cruz A., 2012. "Income tax progressivity, physical capital, aggregate uncertainty and long-run growth in an OLG economy," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 955-974.

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