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Optimal Taxation and Life Cycle Labor Supply Profile

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  • Céspedes, Nikita

    (Banco Central de Reserva del Perú
    PUCP)

  • Kuklik, Michael

    (Long Island University)

Abstract

The 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 Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2013-020.

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Date of creation: Dec 2013
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Handle: RePEc:rbp:wpaper:2013-020

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Keywords: Labor supply; optimal taxation; capital taxation; non-linear wage; inter-vivos transfer;

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References

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  1. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
  2. Victoria Osuna Padilla & José-Víctor Ríos-Rull, 2002. "Implementing the 35 Hour Workweek by Means of Overtime Taxation," Economic Working Papers at Centro de Estudios Andaluces E2002/04, Centro de Estudios Andaluces.
  3. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, . "The Effects of Income and Wealth on Time and MOney Transfers Between Parents and Children," IPR working papers 96-5, Institute for Policy Resarch at Northwestern University.
  4. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  5. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  6. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  7. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  8. William G. Gale & John Karl Scholz, 1991. "Intergenerational Transfers and the Accumulation of Wealth," UCLA Economics Working Papers 624, UCLA Department of Economics.
  9. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  11. Waldo Mendoza Bellido, 2013. "Contexto internacional y desempeño macroeconómico en América Latina y el Perú: 1980-2012," Documentos de Trabajo 2013-351, Departamento de Economía - Pontificia Universidad Católica del Perú.
  12. Nikita Céspedes Reynaga & Silvio Rendon, 2012. "The Frisch Elasticity in Labor Markets with high Job Turnover," Department of Economics Working Papers 12-13, Stony Brook University, Department of Economics.
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  1. Optimal Taxation and Life Cycle Labor Supply Profile
    by Christian Zimmermann in NEP-DGE blog on 2014-03-16 14:59:59
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Cited by:
  1. Mario D. Tello, 2013. "Science, Technology and Innovation in Peru 2000-2012: The Case of Services," Documentos de Trabajo 2013-353, Departamento de Economía - Pontificia Universidad Católica del Perú.

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