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Optimal Dynamic Taxes

  • Mikhail Golosov
  • Maxim Troshkin
  • Aleh Tsyvinski

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.

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File URL: http://www.nber.org/papers/w17642.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17642.

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Date of creation: Dec 2011
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Publication status: published as "Optimal Taxation: Merging Micro and Macro Approaches" (with M. Troshkin and A. Tsyvinski), Journal of Money, Credit and Banking, Supplement to 43 (5), (2011): 147-174
Handle: RePEc:nbr:nberwo:17642
Note: EFG PE
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  1. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  2. Juan C. Conesa & Dirk Krueger, 2004. "Taxing Capital: Not a Bad Idea After All," 2004 Meeting Papers 403, Society for Economic Dynamics.
  3. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-74, Fall.
  4. Stephen Coate & Marco Battaglini, 2004. "Pareto Efficient Income Taxation with Stochastic Abilities," 2004 Meeting Papers 140, Society for Economic Dynamics.
  5. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report 259, Federal Reserve Bank of Minneapolis.
  6. Fatih Guvenen, 2005. "An Empirical Investigation of Labor Income Processes," Macroeconomics 0508026, EconWPA.
  7. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  8. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  9. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
  10. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
  11. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, March.
  12. Marek Kapicka, 2013. "Efficient Allocations in Dynamic Private Information Economies with Persistent Shocks: A First-Order Approach," Review of Economic Studies, Oxford University Press, vol. 80(3), pages 1027-1054.
  13. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers 663, Federal Reserve Bank of Minneapolis.
  14. Matthew Weinzierl, 2011. "The Surprising Power of Age-Dependent Taxes," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1490-1518.
  15. Bernard Salanié, 2003. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262194864, June.
  16. Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2055-2077, November.
  17. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  18. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
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