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Optimal Taxation and Social Insurance ina Lifetime Perspective

  • Lans Bovenberg
  • Peter Birch Sørensen

Advances in information technology have improved the administrative feasibility ofredistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante against skill heterogeneity as well as disabilityrisk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather thanannual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-03/cesifo1_wp1690.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1690.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1690
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  1. Martin Feldstein & Daniel Altman, 2007. "Unemployment Insurance Savings Accounts," NBER Chapters, in: Tax Policy and the Economy, Volume 21, pages 35-64 National Bureau of Economic Research, Inc.
  2. Joseph Stiglitz & Jungyoll Yun, 2002. "Integration of Unemployment Insurance with Retirement Insurance," NBER Working Papers 9199, National Bureau of Economic Research, Inc.
  3. Peter A. Diamond, 2003. "Taxation, Incomplete Markets, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042134, June.
  4. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  5. Folster, Stefan, 1999. "Social Insurance Based on Personal Savings," The Economic Record, The Economic Society of Australia, vol. 75(228), pages 5-18, March.
  6. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Fölster, Stefan & Gidehag, Robert & Orszag, Mike & Snower, Dennis J., 2002. "Assessing Welfare Accounts," IZA Discussion Papers 533, Institute for the Study of Labor (IZA).
  8. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
  9. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-23.
  10. Lans Bovenberg & Peter Birch Sørensen, 2003. "Improving the Equity-Efficiency Trade-off: Mandatory Savings Accounts for Social Insurance," CESifo Working Paper Series 1041, CESifo Group Munich.
  11. Orszag, Mike & Snower, Dennis J., 1997. "Expanding the Welfare System: A Proposal for Reform," CEPR Discussion Papers 1674, C.E.P.R. Discussion Papers.
  12. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
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