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The Welfare Gains of Age Related Optimal Income Taxation

  • Bastani, Spencer

    ()

    (Uppsala Center for Fiscal Studies)

  • Blomquist, Sören

    ()

    (Uppsala Center for Fiscal Studies)

  • Micheletto, Luca

    ()

    (Uppsala Center for Fiscal Studies)

Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2010:12.

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Length: 48 pages
Date of creation: 25 Oct 2010
Date of revision:
Publication status: Published as Bastani, Spencer, Sören Blomquist and Luca Micheletto, 'The Welfare Gains of Age Related Optimal Income Taxation' in International Economic Review, 2013, pages 1219-1249.
Handle: RePEc:hhs:uufswp:2010_012
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Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

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