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Optimal Taxation Over the Life Cycle

Author

Listed:
  • Aspen Gorry

    (University of California, Santa Cruz)

  • Ezra Oberfield

    (Federal Reserve Bank of Chicago)

Abstract

We derive the optimal labor income tax schedule for a life cycle model with deterministic productivity variation and complete asset markets. An individual chooses whether and how much to work at each date. The government must finance a given expenditure and does not have access to lump sum taxation. We develop a solution method that uses the primal approach to solve for the optimal non-linear tax function. The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. Even in the absence of redistributive concerns, the optimal tax schedule has an increasing average tax rate at low levels of income to encourage labor market participation. The marginal tax rate at the top is strictly positive. Finally, the model is used to assess the effects of changing the current tax schedule to the optimal one. Under the preferred parameters, this delivers a welfare gain equivalent to 0.67 percent of lifetime consumption. (Copyright: Elsevier)

Suggested Citation

  • Aspen Gorry & Ezra Oberfield, 2012. "Optimal Taxation Over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 551-572, October.
  • Handle: RePEc:red:issued:11-116
    DOI: 10.1016/j.red.2012.05.002
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    References listed on IDEAS

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    Cited by:

    1. repec:red:issued:17-49 is not listed on IDEAS
    2. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2017. "Optimal Tax Progressivity: An Analytical Framework," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1693-1754.
    3. Claudio Michelacci & Hernán Ruffo, 2015. "Optimal Life Cycle Unemployment Insurance," American Economic Review, American Economic Association, vol. 105(2), pages 816-859, February.
    4. Philippe Choné & Guy Laroque, 2014. "Income tax and retirement schemes," Working Papers hal-01070554, HAL.
    5. repec:eee:hapoch:v1_713 is not listed on IDEAS
    6. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.
    7. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
    8. Christian vom Lehn & Eric Fisher & Aspen Gorry, 2018. "Male Labor Supply and Generational Fiscal Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 121-149, April.

    More about this item

    Keywords

    Optimal taxation; life cycle; extensive margin; Ramsey problem; non-linear taxation; primal approach;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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