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Optimal Taxation and Life Cycle Labor Supply Profile

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  • Michael Kuklik

    (Long Island University)

  • Nikita Céspedes

    (Central Bank of Peru)

Abstract

The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.

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Bibliographic Info

Paper provided by Peruvian Economic Association in its series Working Papers with number 2014-8.

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Date of creation: Feb 2014
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Handle: RePEc:apc:wpaper:2014-008

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Web page: http://perueconomics.org/
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Keywords: Labor supply; optimal taxation; capital taxation; non-linear wage; inter-vivos transfer;

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References

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  1. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9812, University of Western Ontario, Department of Economics.
  2. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  3. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  4. Conesa, Juan Carlos & Kitao, Sagiri & Krüger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5929, C.E.P.R. Discussion Papers.
  5. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, 1996. "The Effects of Income and Wealth on Time and Money Transfers between Parents and Children," NBER Working Papers 5522, National Bureau of Economic Research, Inc.
  6. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. W. G. Gale & J. K. Scholz, . "Intergenerational transfers and the accumulation of wealth," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1019-93, University of Wisconsin Institute for Research on Poverty.
  8. Waldo Mendoza Bellido, 2013. "Contexto internacional y desempeño macroeconómico en América Latina y el Perú: 1980-2012," Documentos de Trabajo, Departamento de Economía - Pontificia Universidad Católica del Perú 2013-351, Departamento de Economía - Pontificia Universidad Católica del Perú.
  9. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  10. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  11. Victoria Osuna Padilla & José-Víctor Ríos-Rull, 2002. "Implementing the 35 Hour Workweek by Means of Overtime Taxation," Economic Working Papers at Centro de Estudios Andaluces, Centro de Estudios Andaluces E2002/04, Centro de Estudios Andaluces.
  12. Nikita Céspedes Reynaga & Silvio Rendon, 2012. "The Frisch Elasticity in Labor Markets with high Job Turnover," Department of Economics Working Papers, Stony Brook University, Department of Economics 12-13, Stony Brook University, Department of Economics.
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  1. Optimal Taxation and Life Cycle Labor Supply Profile
    by Christian Zimmermann in NEP-DGE blog on 2014-03-16 14:59:59
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Cited by:
  1. Mario D. Tello, 2013. "Science, Technology and Innovation in Peru 2000-2012: The Case of Services," Documentos de Trabajo, Departamento de Economía - Pontificia Universidad Católica del Perú 2013-353, Departamento de Economía - Pontificia Universidad Católica del Perú.

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