The effects of population aging on optimal redistributive taxes in an overlapping generations model
AbstractThe impact of population aging on the steady state solution to a Ordover-Phelps (1979) overlapping generations optimal nonlinear income tax problem with two types of workers and quasilinear-in-leisure preferences is investigated. A decrease in the rate of population growth, which leads to an aging population, increases the relative price of consumption per person in retirement, which tends to decrease optimal consumption for retirees of both skill types. It is also shown that the optimal steady state rate of interest equals the rate of population growth. As a result, the steady state interest rate unambiguously declines when the rate of population growth declines. The resulting adjustments in production plans has an ambiguous effect on the aggregate wage rate. This article identifies factors contributing to an increase in the aggregate wage when the population ages, namely normality of consumption in retirement, complementarity between capital and labor in production, and a large capital deepening effect relative to the increase in dependency owing to demographic change. Depending on the sign of this wage effect, ambiguities may arise in the direction of change in the optimal steady state consumption and production plans. It is also shown that the optimal marginal income tax rates are independent of the rate of population growth.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 8585.
Date of creation: 25 Mar 2008
Date of revision:
optimal income taxation; overlapping generations model; population aging;
Other versions of this item:
- Craig Brett, 2012. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," International Tax and Public Finance, Springer, vol. 19(6), pages 777-799, December.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-AGE-2008-05-10 (Economics of Ageing)
- NEP-ALL-2008-05-10 (All new papers)
- NEP-DGE-2008-05-10 (Dynamic General Equilibrium)
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