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Age Related Optimal Income Taxation

  • Blomquist, Sören

    ()

    (Department of Economics)

  • Micheletto, Luca

    ()

    (Istituto di Economia Politica)

The focus of the present paper is on the intragenerational effects of nonlinear income taxation in a multiperiod framework. We investigate whether it is possible to achieve redistribution at smaller efficiency costs by enlarging the message space adopted in standard tax system (which only includes reported income) to consider also the age of taxpayers. Since it would be awkward to analyze an age related tax without taking into account the time-dimension, we use an intertemporal extension of the Stiglitz-Stern (1982, 1982) discrete adaptation of the Mirrlees (1971) optimal income taxation model. In the simplest version of the model we neglect the possibility of savings. This case can be interpreted as a situation with extreme liquidity constraints. It is shown that switching to an age related tax system opens the way for a Pareto improving tax reform entailing a cut in marginal tax rates for young agents. In a second version of the model we retain the possibility of savings and, assuming that the policy maker can tax interest incomes on a linear scale, we also analyze the optimal values of the interest income tax rate for the age dependent and the age independent tax systems.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2003:7.

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Length: 54 pages
Date of creation: 07 Feb 2003
Date of revision:
Handle: RePEc:hhs:uunewp:2003_007
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
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Fax: + 46 18 471 14 78
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  1. Viard, Alan D, 2001. " Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump-Sum Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 483-500.
  2. Picard, Pierre M., 2001. "Job additionality and deadweight spending in perfectly competitive industries: the case for optimal employment subsidies," Journal of Public Economics, Elsevier, vol. 79(3), pages 521-541, March.
  3. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  4. Hahn, Frank H., 1973. "On optimum taxation," Journal of Economic Theory, Elsevier, vol. 6(1), pages 96-106, February.
  5. Kaplow, Louis, 1995. "A Fundamental Objection to Tax Equity Norms: A Call for Utilitarianism," National Tax Journal, National Tax Association, vol. 48(4), pages 497-514, December.
  6. Brett, Craig, 1998. "A note on nonlinear taxation in an overlapping generations model," MPRA Paper 8776, University Library of Munich, Germany.
  7. Louis Kaplow, 2000. "Horizontal Equity: New Measures, Unclear Principles," NBER Working Papers 7649, National Bureau of Economic Research, Inc.
  8. Louis Kaplow, 1994. "A Fundamental Objection to Tax Equity Norms: A Call for Utilitarianism," NBER Working Papers 4961, National Bureau of Economic Research, Inc.
  9. Hammond, Peter J, 1987. "Markets as Constraints: Multilateral Incentive Compatibility in Continuum Economies," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 399-412, July.
  10. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
  11. Ritva Immonen & Ravi Kanbur & Michael Keen & Matti Tuomala, 1994. "Tagging and taxing: the optimal use of categorical and income information in designing tax/transfer schemes," IFS Working Papers W94/05, Institute for Fiscal Studies.
  12. Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, vol. 79(3), pages 485-501, March.
  13. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  14. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  15. Louis Kaplow, 1985. "Horizontal Equity: Measures in Search of a Principle," NBER Working Papers 1679, National Bureau of Economic Research, Inc.
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