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Optimal Dynamic Taxes

Author

Listed:
  • Mikhail Golosov

    (Princeton University (Email: golosov@princeton.edu))

  • Maxim Troshkin

    (Yale University and University of Minnesota (Email:maxim.troshkin@yale.edu))

  • Aleh Tsyvinski

    (Yale University (Email:a.tsyvinski@yale.edu))

Abstract

We study optimal labor and savings distortions in a lifecycle model with idiosyncratic shocks. We show a tight connection between its recursive formulation and a static Mirrlees model with two goods, which allows us to derive elasticity-based expressions for the dynamic optimal distortions. We derive a generalization of a savings distortion for non- separable preferences and show that, under certain conditions, the labor wedge tends to zero for sufficiently high skills. We estimate skill distributions using individual data on the U.S. taxes and labor incomes. Computed optimal distortions decrease for sufficiently high incomes and increase with age.

Suggested Citation

  • Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2012. "Optimal Dynamic Taxes," IMES Discussion Paper Series 12-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:12-e-01
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal taxation; Efficiency; Optimal Social insurance;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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