Optimal Tax-Transfer Policies, Life-Cycle Labour Supply and Present-Biased Preferences
Using a two-period model with two types of agents that are characterized by present-biased preferences second-best optimal tax-transfer policies are considered. The paternalistic optimal tax-transfer policy has two main concerns: Income redistribution from high to low ability households and correction of undersaving due to present-biasedness. Policies must comply with incentive-compatibility constraints that restricts both how much income redistribution that can take place and how much savings should be subsidized. A main result is that the degree of present-biasedness has important consequences not only for optimal subsidies to savings but also for optimal marginal income taxes.
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