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Optimal Taxation and Social Insurance in a Lifetime Perspective

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Author Info
Bovenberg, A.L.
Sorensen, P.B. (Tilburg University, Center for Economic Research)

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Abstract

Advances in information technology have improved the administrative feasibility of redis- tribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-14.

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Date of creation: 2007
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Handle: RePEc:dgr:kubcen:200714

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Web page: http://center.uvt.nl

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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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.:
  1. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Blackwell Publishing, vol. 79(4), pages 417-23.
  2. Joseph Stiglitz & Jungyoll Yun, 2002. "Integration of Unemployment Insurance with Retirement Insurance," NBER Working Papers 9199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Martin Feldstein & Daniel Altman, 1998. "Unemployment Insurance Savings Accounts," NBER Working Papers 6860, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. William Vickrey, 1934. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379. [Downloadable!] (restricted)
  5. Fölster, Stefan & Gidehag, Robert & Orszag, Mike & Snower, Dennis, 2002. "Assessing Welfare Accounts," IZA Discussion Papers 533, Institute for the Study of Labor (IZA). [Downloadable!]
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  6. Orszag, Mike & Snower, Dennis J., 1997. "Expanding the Welfare System: A Proposal for Reform," CEPR Discussion Papers 1674, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December. [Downloadable!] (restricted)
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  8. A. Lans Bovenberg & Peter Birch Sørensen, 2004. "Improving the Equity-Efficiency Trade-Off: Mandatory Savings Accounts for Social Insurance," International Tax and Public Finance, Springer, vol. 11(4), pages 507-529, 08. [Downloadable!]
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  9. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May. [Downloadable!] (restricted)
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  1. Peter Birch Sørensen & Martin Ino Hansen & A. Lans Bovenberg, 2006. "Savings Accounts and the Life-Cycle Approach to Social Insurance," EPRU Working Paper Series 06-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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