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On Optimal Lifetime Redistribution Policy

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  • SANNA TENHUNEN
  • MATTI TUOMALA

Abstract

In this paper, we examine various aspects of the optimal lifetime redistribution policy within a cohort. We characterize the optimal tax policy when society consists of individuals who do not differ only in productivity, but also in time preference. We extend Diamond's analysis on nonlinear taxation of savings into the three-type and four-type models. To gain a better understanding of the lifetime redistribution, the problem is also solved numerically. Our results provide a rationale for distortions (upward and downward) in savings behavior in a simple two-period model where high-skilled and low-skilled individuals have different nonobservable time preferences beyond their earning capacity. If we interpret our model so that instead of private savings there is public provision of pension in the second period, then in the three-type model, we find a nonmonotonic pattern of the replacement rates. The numerical results suggest that retirement consumption is less dispersed than the first-period consumption in a paternalistic case. Paternalistic government policy also increases second-period consumption compared to the welfarist case. Copyright © 2010 Wiley Periodicals, Inc..

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  • Sanna Tenhunen & Matti Tuomala, 2010. "On Optimal Lifetime Redistribution Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 171-198, February.
  • Handle: RePEc:bla:jpbect:v:12:y:2010:i:1:p:171-198
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    1. Sanna Tenhunen & Matti Tuomala, 2010. "On Optimal Lifetime Redistribution Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 171-198, February.
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    1. Cremer, Helmuth & Pestieau, Pierre, 2011. "Myopia, redistribution and pensions," European Economic Review, Elsevier, vol. 55(2), pages 165-175, February.
    2. Diamond, Peter, 2010. "Taxes and Pensions," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 59-74.
    3. Helmuth Cremer & Philippe De Donder & Dario Maldonado & Pierre Pestieau, 2009. "Forced Saving, Redistribution, and Nonlinear Social Security Schemes," Southern Economic Journal, Southern Economic Association, vol. 76(1), pages 86-98, July.
    4. Guo, Jang-Ting & Krause, Alan, 2015. "Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 101-119.
    5. Kerstin Roeder, 2014. "Optimal taxes and pensions with myopic agents," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(3), pages 597-618, March.
    6. Aronsson, Thomas & Sjögren, Tomas, 2016. "Quasi-hyperbolic discounting, paternalism and optimal mixed taxation," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 24-36.
    7. András Simonovits, 2015. "Socially optimal contribution rate and cap in a proportional (DC) pension system," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 14(1), pages 45-63, December.
    8. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.
    9. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2016. "Public Pensions in a Multi-Period Mirrleesian Income Tax Model," CESifo Working Paper Series 6206, CESifo Group Munich.
    10. Sanna Tenhunen & Matti Tuomala, 2010. "On Optimal Lifetime Redistribution Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(1), pages 171-198, February.
    11. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 485-512, June.

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