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Optimal Taxation over the Life Cycle

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  • Gorry, Aspen
  • Oberfield, Ezra

Abstract

We derive the optimal labor income tax schedule for a life cycle model with deterministic productivity variation and complete asset markets. An individual chooses whether and how much to work at each date. The government must finance a given expenditure and does not have access to lump sum taxation. We develop a solution method that combines incentive constraints into a single implementability constraint. The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. The optimal tax schedule has an increasing average tax rate at low levels of income to encourage labor market participation, even in the absence of redistributive concerns. In contrast to the Mirrleesian optimal taxation literature, the marginal tax rate at the top is strictly positive.

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File URL: http://mpra.ub.uni-muenchen.de/25297/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25297.

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Date of creation: 26 May 2010
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Handle: RePEc:pra:mprapa:25297

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Keywords: Optimal Taxation; Life Cycle; Mirrlees;

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References

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  2. Gervais, Martin, 2009. "On the optimality of age-dependent taxes and the progressive U.S. tax system," Discussion Paper Series In Economics And Econometrics 0905, Economics Division, School of Social Sciences, University of Southampton.
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Cited by:
  1. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.
  2. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
  3. Philippe Choné & Guy Laroque, 2014. "Income tax and retirement schemes," Sciences Po publications 2014-06, Sciences Po.
  4. Philippe Choné & Guy Laroque, 2014. "Income tax and retirement schemes," Sciences Po Economics Discussion Papers 2014-06, Sciences Po Departement of Economics.

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