Optimal Taxation in Life-Cycle Economies
AbstractThis paper studies optimal taxation in an overlapping generations economy. We characterize the optimal path of fiscal policy, both in the long run and in the transition to the steady state. The implications of this study are in sharp contrast with the prescription offered by infinitely-lived agent models. First, the government's desire to tax initial holdings of capital at confiscatory rates is endogenously curtailed by intergenerational redistributional considerations. Second, because of life-cycle elements, capital income taxes are in general different from zero even in the steady state. The tax rate on capital income should only be zero if it is optimal to tax consumption goods uniformly over the lifetime of individuals. The conditions for uniform taxation of consumption depend, in turn, on preferences, the age-profile of labor productivity, and the set of taxes available to the government.
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Bibliographic InfoPaper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 9812.
Date of creation: 09 Nov 1998
Date of revision:
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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
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Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html
Other versions of this item:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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