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Optimal progressivity with age-dependent taxation

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  • Heathcote, Jonathan
  • Storesletten, Kjetil
  • Violante, Giovanni L.

Abstract

This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.

Suggested Citation

  • Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2020. "Optimal progressivity with age-dependent taxation," Journal of Public Economics, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:pubeco:v:189:y:2020:i:c:s0047272719301355
    DOI: 10.1016/j.jpubeco.2019.104074
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    Cited by:

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    3. Boháček, Radim & Kejak, Michal, 2018. "Optimal government policies in models with heterogeneous agents," Journal of Economic Theory, Elsevier, vol. 176(C), pages 834-858.
    4. Aleh Tsyvinski & Nicolas Werquin, 2017. "Generalized Compensation Principle," NBER Working Papers 23509, National Bureau of Economic Research, Inc.
    5. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    6. Brant Abbott, 2022. "Incomplete Markets and Parental Investments in Children," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 104-124, April.
    7. Rauh, Christopher & Rodrigues dos Santos, Marcelo, 2022. "How do transfers and universal basic income impact the labor market and inequality?," CEPR Discussion Papers 16993, C.E.P.R. Discussion Papers.
    8. Chung Tran & Nabeeh Zakariyya, 2023. "Progressive Pension and Optimal Tax Progressivity," ANU Working Papers in Economics and Econometrics 2023-691, Australian National University, College of Business and Economics, School of Economics.
    9. Uribe-Terán, Carlos, 2021. "Higher taxes at the top? The role of tax avoidance," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    10. Grancini, Stefano, 2021. "Risk Aversion and Fiscal Consolidation Programs," MPRA Paper 105500, University Library of Munich, Germany.
    11. Francesca Parodi, 2023. "Taxation of Consumption and Labor Income: A Quantitative Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(4), pages 177-216, October.
    12. Abdoulaye Ndiaye, 2017. "Flexible Retirement and Optimal Taxation," Working Paper Series WP-2018-18, Federal Reserve Bank of Chicago.
    13. Brant Abbott, 2022. "Incomplete Markets and Parental Investments in Children," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 104-124, April.
    14. De Dominicis, Piero, 2020. "Routinization and Covid-19: a comparison between United States and Portugal," MPRA Paper 101003, University Library of Munich, Germany.
    15. da Costa, Carlos E. & Santos, Marcelo R., 2023. "Progressive consumption taxes," Journal of Public Economics, Elsevier, vol. 220(C).
    16. Vedor, Bernardo, 2022. "Investment-Specific Technological Change and Universal Basic Income in the U.S," MPRA Paper 111675, University Library of Munich, Germany.
    17. Louis Kaplow, 2022. "Optimal Income Taxation," NBER Working Papers 30199, National Bureau of Economic Research, Inc.
    18. soyoung Lee, 2018. "The Role of Firm Heterogeneity in the Earnings Inequality," 2018 Meeting Papers 1155, Society for Economic Dynamics.

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    More about this item

    Keywords

    Tax progressivity; Life cycle; Income distribution; Skill iInvestment; Labor supply; Skill investment;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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