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Optimum Taxation of Life Annuities

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  • Johann K. Brunner
  • Susanne Pech

Abstract

The market for private life annuities is characterised by adverse selection, that is, contracts offer lower than fair payoffs to individuals with low life expectancy. Moreover, life expectancy and income have been found to be positively correlated. The paper shows that a linear tax on annuity payoffs, which raises more revenues from long-living individuals than from short-living, represents an appropriate instrument for redistribution, in addition to an optimally designed labour income tax. Further, we find that a nonlinear tax on annuity payoffs can be directly employed to correct the distortion of the rate of return caused by asymmetric information. These results are contrasted with theoretical findings concerning the role of a tax on capital income.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1642.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1642

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Keywords: optimum taxation; life annuities; adverse selection;

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References

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  1. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, 1997. "Redistribution with unobservable bequests: a case for taxing capital income," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Bommier, Antoine & Leroux, Marie-Louise & Lozachmeur, Jean-Marie, 2011. "On the public economics of annuities with differential mortality," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7-8), pages 612-623, August.
  2. Direr, A., 2010. "The taxation of life annuities under adverse selection," Journal of Public Economics, Elsevier, Elsevier, vol. 94(1-2), pages 50-58, February.

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