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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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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. Bernard Salanié, 2003. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262194864, March.
  2. Juan Carlos Conesa & Dirk Krueger, 2004. "On the Optimal Progressivity of the Income Tax Code," Working Papers 131, Barcelona Graduate School of Economics.
  3. Narayana Kocherlakota & Borys Grochulski, 2008. "Nonseparable Preferences and Optimal Social Security Systems," 2008 Meeting Papers 16, Society for Economic Dynamics.
  4. 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.
  5. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
  6. Juan C. Conesa & Dirk Krueger, 2004. "Taxing Capital: Not a Bad Idea After All," 2004 Meeting Papers 403, Society for Economic Dynamics.
  7. Peter Diamond & Johannes Spinnewijn, 2011. "Capital Income Taxes with Heterogeneous Discount Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 52-76, November.
  8. Ivan Werning & Emmanuel Farhi, 2009. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," 2009 Meeting Papers 1262, Society for Economic Dynamics.
  9. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  10. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, December.
  11. N. Gregory Mankiw & Matthew C. Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Harvard Business School Working Papers 09-140, Harvard Business School.
  12. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
  13. Kenichi Fukushima, 2010. "Quantifying the Welfare Gains From Flexible Dynamic Income Tax Systems," 2010 Meeting Papers 410, Society for Economic Dynamics.
  14. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," NajEcon Working Paper Reviews 391749000000000449, www.najecon.org.
  15. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers 663, Federal Reserve Bank of Minneapolis.
  16. Narayana Kocherlakota, 2004. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 122247000000000729, UCLA Department of Economics.
  17. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  18. Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 844-868, April.
  19. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  20. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
  21. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
  22. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. 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.
  24. Narayana R. Kocherlakota, 2010. "The New Dynamic Public Finance," Economics Books, Princeton University Press, edition 1, number 9222, 06-2016.
  25. Matthew Weinzierl, 2011. "The Surprising Power of Age-Dependent Taxes," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1490-1518.
  26. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
  27. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  28. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
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