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Optimal Taxation and Life Cycle Labor Supply Profile

  • Michael Kuklik

    (Long Island University)

  • Nikita Céspedes

    (Central Bank of Peru)

The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.

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Paper provided by Peruvian Economic Association in its series Working Papers with number 2014-8.

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Date of creation: Feb 2014
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Handle: RePEc:apc:wpaper:2014-008
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  1. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  2. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  3. Daniel Aaronson & Eric French, 2001. "The effect of part-time work on wages: evidence from the Social Security rules," Working Paper Series WP-01-20, Federal Reserve Bank of Chicago.
  4. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  5. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  6. William G. Gale & John Karl Scholz, 1994. "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 145-160, Fall.
  7. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  8. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  9. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  10. Adolfo Figueroa, 1995. "Desigualdad y Democracia," Capítulos de Libros PUCP / Chapters of PUCP books, in: Gonzalo Portocarrero & Marcel Valcárcel (ed.), El Perú frente al siglo XXI, edition 1, chapter 3, pages 48-71 Departamento de Economía - Pontificia Universidad Católica del Perú.
  11. Victoria Osuna & Jose-Victor Rios-Rull, 2003. "Implementing the 35 Hour Workweek by Means of Overtime Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 179-206, January.
  12. Waldo Mendoza Bellido, 2013. "Contexto internacional y desempeño macroeconómico en América Latina y el Perú: 1980-2012," Documentos de Trabajo / Working Papers 2013-351, Departamento de Economía - Pontificia Universidad Católica del Perú.
  13. Nikita Céspedes Reynaga & Silvio Rendon, 2012. "The Frisch Elasticity in Labor Markets with high Job Turnover," Department of Economics Working Papers 12-13, Stony Brook University, Department of Economics.
  14. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, . "The Effects of Income and Wealth on Time and MOney Transfers Between Parents and Children," IPR working papers 96-5, Institute for Policy Resarch at Northwestern University.
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