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Optimum Taxation of Life Annuities

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Author Info
Johann K. Brunner () (Department of Economics, Johannes Kepler University Linz, Austria)
Susanne Pech () (Department of Economics, Johannes Kepler University Linz, Austria)

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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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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2005-06.

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Date of creation: Nov 2005
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Handle: RePEc:jku:econwp:2005_06

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Keywords: Optimum taxation life annuities adverse selection

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
G2 - Financial Economics - - Financial Institutions and Services

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