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On the optimal lifetime redistribution and social objectives: a multidimensional approach

Author

Listed:
  • Terhi Ravaska

    () (University of Tampere)

  • Sanna Tenhunen

    () (Finnish Centre for Pensions)

  • Matti Tuomala

    () (University of Tampere)

Abstract

We characterize optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life cycle and this preference together with productivity is non-observable to government. We consider different social objectives and incorporate a novel approach taken in the spirit of Roemer (Equality of opportunity, Harvard University Press, Harvard, 1998) and Van de Gaer (Equality of opportunity and investments in human capital, Katholieke Universiteit Leuven, 1993). This approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also numerically examine the properties of an optimal lifetime redistribution policy. We find support for a nonlinear tax/pension program in which impatient types are taxed at the margin, and patient low ability types are subsidized in their retirement consumption. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between different social objectives, indicating that the optimal income taxation results are sensitive to the choice of the social planner’s goals.

Suggested Citation

  • Terhi Ravaska & Sanna Tenhunen & Matti Tuomala, 2018. "On the optimal lifetime redistribution and social objectives: a multidimensional approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 631-653, June.
  • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:3:d:10.1007_s10797-017-9473-0
    DOI: 10.1007/s10797-017-9473-0
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal taxation; Lifetime redistribution; Heterogeneous time preferences;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations

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