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Optimal Tax-Transfer Policies, Life-Cycle Labour Supply and Present-Biased Preferences

  • Lasse Frisgaard Gunnersen

    (Department of Economics and Business, Aarhus University, Denmark)

  • Bo Sandemann Rasmussen

    ()

    (Department of Economics and Business, Aarhus University, Denmark)

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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File URL: ftp://ftp.econ.au.dk/afn/wp/12/wp12_12.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2012-12.

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Length: 37
Date of creation: 24 May 2012
Date of revision:
Handle: RePEc:aah:aarhec:2012-12
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Bastani, Spencer & Blomquist, Sören & Micheletto, Luca, 2010. "The Welfare Gains of Age Related Optimal Income Taxation," Working Paper Series, Center for Fiscal Studies 2010:12, Uppsala University, Department of Economics.
  2. CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, 2008. "Forced saving, redistribution and nonlinear social security schemes," CORE Discussion Papers 2008020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. 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.
  4. Sören Blomquist & Luca Micheletto, 2008. "Age-related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, 03.
  5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  6. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
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