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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 School of Economics and Management, University of Aarhus 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. Helmuth Cremer & Philippe De Donder & Darío Maldonado & Pierre Pestieau, 2008. "Forced Saving, Redistribution and Nonlinear Social Security Schemes," CESifo Working Paper Series 2325, CESifo Group Munich.
  2. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2013. "The Welfare Gains Of Age‐Related Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1219-1249, November.
  3. Blomquist, Sören & Micheletto, Luca, 2003. "Age Related Optimal Income Taxation," Working Paper Series 2003:7, Uppsala University, Department of Economics.
  4. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
  5. Craig Brett & John A. Weymark, 2005. "Optimal Nonlinear Taxation of Income and Savings in a Two Class Economy," Vanderbilt University Department of Economics Working Papers 0525, Vanderbilt University Department of Economics.
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