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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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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. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
  2. 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.
  3. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," MPRA Paper 14173, University Library of Munich, Germany.
  4. Peter A. Diamond, 2003. "Taxation, Incomplete Markets, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042134, June.
  5. Jusot, Florence, 2006. "The shape of the relationship between mortality and income in France," Economics Papers from University Paris Dauphine 123456789/425, Paris Dauphine University.
  6. Angus Deaton & Christina Paxson, 1999. "Mortality, Education, Income, and Inequality among American Cohorts," NBER Working Papers 7140, National Bureau of Economic Research, Inc.
  7. 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.
  8. Emmanuel Saez, 2000. "The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes," NBER Working Papers 8029, National Bureau of Economic Research, Inc.
  9. Johann K. Brunner & Susanne Pech, 2000. "Adverse selection in the annuity market when payoffs vary over the time of retirement," Economics working papers 2000-30, Department of Economics, Johannes Kepler University Linz, Austria.
  10. François Bourguignon & Amadéo Spadaro, 2005. "Tax-benefit revealed social preferences," PSE Working Papers halshs-00590779, HAL.
  11. 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.
  12. repec:cai:recosp:reco_p2000_51n3_0473 is not listed on IDEAS
  13. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December.
  14. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  15. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  16. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  17. 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.
  18. 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.
  19. 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.
  20. Johann K. Brunner & Susanne Pech, 2006. "Optimum Taxation of Life Annuities," CESifo Working Paper Series 1642, CESifo Group Munich.
  21. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, March.
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