The effects of population aging on optimal redistributive taxes in an overlapping generations model
AbstractThe impact of population aging on the steady-state solution to an Ordover and Phelps (J. Public Econ. 12:1–26, 1979 ) overlapping generations optimal nonlinear income tax problem with two types of worker and quasilinear-in-leisure preferences is investigated. A decrease in the rate of population growth, which leads to an aging population, increases the relative price of consumption per person in retirement, which tends to decrease optimal consumption for retirees of both skill types. Nevertheless, it is also shown that the optimal marginal income tax rates are independent of the rate of population growth. In addition, the steady-state interest rate unambiguously declines when the rate of population growth declines. Resulting adjustments in production plans have an ambiguous effect on the aggregate wage rate. This article identifies factors contributing to an increase in the aggregate wage when the population ages, namely normality of consumption in retirement, complementarity between capital and labor in production, and a large capital deepening effect relative to the increase in dependency owing to demographic change. Depending on the sign of this wage effect, ambiguities may arise in the direction of change in the optimal steady-state consumption and production plans. However, when the dependency effect is sufficiently strong, it is possible to sign the direction of change in all production and consumption plans. Moreover, regardless of the direction of change in optimal consumption plans, the absolute value of the changes in consumption plans are smaller for low-skilled workers than for high-skilled when utility is time-separable and preferences exhibit decreasing absolute risk aversion. Adopting, instead, a quasilinear-in-consumption specification of preferences sharpens the comparative statics of consumption allocations, but introduces ambiguity into the effect of the rate of population growth on the optimal marginal income tax rate. Copyright Springer Science+Business Media, LLC 2012
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal International Tax and Public Finance.
Volume (Year): 19 (2012)
Issue (Month): 6 (December)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=102915
Optimal income taxation; Overlapping generations model; Population aging; D82; H21;
Other versions of this item:
- Brett, Craig, 2008. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," MPRA Paper 8585, University Library of Munich, Germany.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, vol. 79(3), pages 485-501, March.
- Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
- Craig Brett & John A. Weymark, 2008.
"Public Good Provision And The Comparative Statics Of Optimal Nonlinear Income Taxation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 255-290, 02.
- Craig Brett & John A. Weymark, 2004. "Public Good Provision and the Comparative Statics of Optimal Nonlinear Income Taxation," Vanderbilt University Department of Economics Working Papers 0415, Vanderbilt University Department of Economics.
- Meijdam, Lex & Verbon, Harrie A A, 1997.
"Aging and Public Pensions in an Overlapping-Generations Model,"
Oxford Economic Papers,
Oxford University Press, vol. 49(1), pages 29-42, January.
- Meijdam, L. & Verbon, H.A.A., 1995. "Aging and public pensions in an overlapping-generations model," Discussion Paper 1995-38, Tilburg University, Center for Economic Research.
- Meijdam, A.C. & Verbon, H.A.A., 1997. "Aging and public pensions in an overlapping-generations model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73874, Tilburg University.
- Craig Brett & John Weymark, 2008. "Optimal Nonlinear Taxation of Income and Savings without Commitment," Vanderbilt University Department of Economics Working Papers 0805, Vanderbilt University Department of Economics.
- Laurent Simula, 2010.
"Optimal nonlinear income tax and nonlinear pricing: optimality conditions and comparative static properties,"
Social Choice and Welfare,
Springer, vol. 35(2), pages 199-220, July.
- Simula, Laurent, 2009. "Optimal Nonlinear Income Tax and Nonlinear Pricing: Optimality Conditions and Comparative Static Properties," Working Paper Series, Center for Fiscal Studies 2009:11, Uppsala University, Department of Economics.
- Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
- David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990.
"An Aging Society: Opportunity or Challenge?,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
- HAMILTON, Jonathan & PESTIEAU, Pierre, 2002.
"Optimal income taxation and the ability distribution: implications for migration equilibria,"
CORE Discussion Papers
2002036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Jonathan Hamilton & Pierre Pestieau, 2005. "Optimal Income Taxation and the Ability Distribution: Implications for Migration Equilibria," International Tax and Public Finance, Springer, vol. 12(1), pages 29-45, January.
- BOADWAY, Robin & CUFF, Katherine & MARCHAND, Maurice, .
"Optimal income taxation with quasi-linear preferences revisited,"
CORE Discussion Papers RP
-1466, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Boadway, Robin & Cuff, Katherine & Marchand, Maurice, 2000. " Optimal Income Taxation with Quasi-linear Preferences Revisited," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 435-60.
- Robin Boadway & Katherine Cuff & Maurice Marchand, 1999. "Optimal Income Taxation With Quasi-Linear Preferences Revisited," Working Papers 984, Queen's University, Department of Economics.
- Brett, Craig & Weymark, John A., 2008.
"The impact of changing skill levels on optimal nonlinear income taxes,"
Journal of Public Economics,
Elsevier, vol. 92(7), pages 1765-1771, July.
- Craig Brett & John Weymark, 2007. "The Impact of Changing Skill Levels on Optimal Nonlinear Income Taxes," Vanderbilt University Department of Economics Working Papers 0708, Vanderbilt University Department of Economics.
- Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
- Dillen, M. & Lundholm, M., 1992.
"Dynamic Income Taxation, Redistribution, and the Ratchet Effect,"
1992-3, Uppsala - Working Paper Series.
- Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, vol. 59(1), pages 69-93, January.
- Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, December.
- BOADWAY, Robin & PESTIEAU, Pierre, .
"Tagging and redistributive taxation,"
CORE Discussion Papers RP
-1932, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
- Susan A. McDaniel, 2003. "Toward Disentangling Policy Implications of Economic and Demographic Changes in Canada's Aging Population," Canadian Public Policy, University of Toronto Press, vol. 29(4), pages 491-509, December.
- Berliant, Marcus & Ledyard, John, 2011.
"Optimal Dynamic Nonlinear Income Taxes with No Commitment,"
31749, University Library of Munich, Germany.
- Marcus Berliant & John Ledyard, 2004. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Public Economics 0403004, EconWPA, revised 21 Jun 2005.
- Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.