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The taxation of life annuities under adverse selection

  • Direr, A.

This paper studies how annuities should be taxed in a Mirrlees-type model in the presence of adverse selection and a positive link between income and longevity. The government is able to address the adverse selection problem by implementing a progressive marginal tax rate on annuities. This amounts to subsidizing small annuities (purchased by low incomes) and taxing large annuities (purchased by high incomes). Numerical simulations suggest that the taxation is significant and becomes more pronounced as annuitants get older.

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File URL: http://www.sciencedirect.com/science/article/pii/S0047-2727(09)00146-7
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 94 (2010)
Issue (Month): 1-2 (February)
Pages: 50-58

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Handle: RePEc:eee:pubeco:v:94:y:2010:i:1-2:p:50-58
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Angus S. Deaton & Christina Paxson, 2001. "Mortality, Education, Income, and Inequality among American Cohorts," NBER Chapters, in: Themes in the Economics of Aging, pages 129-170 National Bureau of Economic Research, Inc.
  2. François Bourguignon & Amadéo Spadaro, 2005. "Tax-benefit revealed social preferences," PSE Working Papers halshs-00590779, HAL.
  3. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, December.
  4. Johann K. Brunner & Susanne Pech, 2001. "Adverse Selection in the Annuity Market when Payoffs Vary over the Time of Retirement," CESifo Working Paper Series 412, CESifo Group Munich.
  5. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  6. repec:adr:anecst:y:2006:i:83-84:p:04 is not listed on IDEAS
  7. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  8. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," MPRA Paper 14173, University Library of Munich, Germany.
  9. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  11. Johann K. Brunner & Susanne Pech, 2006. "Optimum Taxation of Life Annuities," CESifo Working Paper Series 1642, CESifo Group Munich.
  12. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  13. Peter A. Diamond, 2003. "Taxation, Incomplete Markets, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042134, March.
  14. Pablo Antolín & Alain de Serres & Christine de la Maisonneuve, 2004. "Long-Term Budgetary Implications of Tax-Favoured Retirement Plans," OECD Economics Department Working Papers 393, OECD Publishing.
  15. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
  16. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  17. repec:dau:papers:123456789/425 is not listed on IDEAS
  18. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
  19. Hans-Martin von Gaudecker & Rembrandt D. Scholz, 2007. "Differential mortality by lifetime earnings in Germany," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 17(4), pages 83-108, August.
  20. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  21. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
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