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Optimal Taxation Over the Life Cycle

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  • Aspen Gorry

    (University of Chicago)

  • Ezra Oberfield

    (University of Chicago)

Abstract

We derive the optimal income tax schedule for a life cycle labor supply model in which productivity varies exogenously and deterministically. Individuals choose 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 solve the model using an implementability constraint as in Lucas and Stokey (1983). The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. In this framework, the optimal tax schedule is progressive (the average tax rate is increasing) at low levels of income, even in the absence of redistributive concerns. Moreover, in contrast to the optimal taxation literature following Mirrlees (1971), the marginal tax rate at the top is strictly positive.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 536.

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Date of creation: 2009
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Handle: RePEc:red:sed009:536

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Cited by:
  1. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
  2. Philippe Choné & Guy Laroque, 2014. "Income Tax and retirement Schemes," Working Papers 2014-07, Centre de Recherche en Economie et Statistique.
  3. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.

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