Optimal Taxation and Life Cycle Labor Supply Profile
AbstractThe optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.
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Bibliographic InfoPaper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2013-020.
Date of creation: Dec 2013
Date of revision:
Labor supply; optimal taxation; capital taxation; non-linear wage; inter-vivos transfer;
Other versions of this item:
- Michael Kuklik & Nikita Cespedes, 2013. "Optimal Taxation and Life Cycle Labor Supply Profile," Documentos de Trabajo 203-352, Departamento de Economía - Pontificia Universidad Católica del Perú.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-12-29 (Accounting & Auditing)
- NEP-ALL-2013-12-29 (All new papers)
- NEP-DGE-2013-12-29 (Dynamic General Equilibrium)
- NEP-MAC-2013-12-29 (Macroeconomics)
- NEP-PUB-2013-12-29 (Public Finance)
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