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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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  1. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  2. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  3. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
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  6. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "The Optimal Income Taxation of Couples," Econometrica, Econometric Society, vol. 77(2), pages 537-560, 03.
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  27. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
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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.
  2. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.
  3. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.

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