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Optimal linear taxation under endogenous longevity

  • Marie-Louise Leroux

    (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique)

  • Pierre Pestieau

    (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, CREPP - Center of Research in Public Economics and Population Economics - Université de Liège, CEPR - Center for Economic Policy Research - CEPR, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

  • Grégory Ponthière

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

This paper studies the optimal linear tax-transfer policy in an economy where agents differ in productivity and in genetic background, and where longevity depends on health spending and genes. It is shown that, if agents internalize imperfectly the impact of genes and health spending on longevity, the utilitarian social optimum can be decentralized with type-specific redistributive lump sum transfers and Pigouvian taxes correcting for agents' myopia (leading to undersaving and underinvestment in health), and for their incapacity to perceive the effect of health spending on the resource constraint of the economy (causing overinvestment in health). The second-best problem is also examined under linear taxation instruments. Our main result is that it may be optimal to tax health spending, in particular under a complementarity of genes and health spending in the production of longevity.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00586241.

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Date of creation: Sep 2008
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Handle: RePEc:hal:psewpa:halshs-00586241
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