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The effects of population aging on optimal redistributive taxes in an overlapping generations model

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  • Brett, Craig

Abstract

The 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8585.

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Date of creation: 25 Mar 2008
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Handle: RePEc:pra:mprapa:8585

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Keywords: optimal income taxation; overlapping generations model; population aging;

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  1. Simula, Laurent, 2009. "Optimal Nonlinear Income Tax and Nonlinear Pricing: Optimality Conditions and Comparative Static Properties," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2009:11, Uppsala University, Department of Economics.
  2. Robin BOADWAY & Pierre PESTIEAU, 2006. "Tagging and redistributive taxation," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 123-147.
  3. Meijdam, A.C. & Verbon, H.A.A., 1997. "Aging and public pensions in an overlapping-generations model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73874, Tilburg University.
  4. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521497695.
  5. Craig Brett & John Weymark, 2008. "Optimal Nonlinear Taxation of Income and Savings without Commitment," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0805, Vanderbilt University Department of Economics.
  6. Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, Elsevier, vol. 79(3), pages 485-501, March.
  7. Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, Elsevier, vol. 59(1), pages 69-93, January.
  8. Berliant, Marcus & Ledyard, John, 2011. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," MPRA Paper 31749, University Library of Munich, Germany.
  9. Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
  10. Craig Brett & John Weymark, 2007. "The Impact of Changing Skill Levels on Optimal Nonlinear Income Taxes," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0708, Vanderbilt University Department of Economics.
  11. Boadway, Robin & Cuff, Katherine & Marchand, Maurice, 2000. " Optimal Income Taxation with Quasi-linear Preferences Revisited," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 435-60.
  12. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, Elsevier, vol. 12(1), pages 1-26, August.
  13. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, Elsevier, vol. 30(2), pages 199-217, July.
  14. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  15. HAMILTON, Jonathan & PESTIEAU, Pierre, 2002. "Optimal income taxation and the ability distribution: implications for migration equilibria," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2002036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 553, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1165-85, September.
  18. Craig Brett & John A. Weymark, 2004. "Public Good Provision and the Comparative Statics of Optimal Nonlinear Income Taxation," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0415, Vanderbilt University Department of Economics.
  19. Susan A. McDaniel, 2003. "Toward Disentangling Policy Implications of Economic and Demographic Changes in Canada's Aging Population," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 29(4), pages 491-509, December.
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Cited by:
  1. 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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