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Taxes on Lifetime Income: A Good Idea?

Author

Listed:
  • Dirk Krueger

    (University of Pennsylvania, CEPR and NBER)

  • Chunzan Wu

    (Peking University)

Abstract

Household consumption and welfare are more strongly associated with lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for a government seeking to provide social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with endogenous labor supply and idiosyncratic wage risks, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax.

Suggested Citation

  • Dirk Krueger & Chunzan Wu, 2025. "Taxes on Lifetime Income: A Good Idea?," PIER Working Paper Archive 25-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:25-011
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    References listed on IDEAS

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    More about this item

    Keywords

    Lifetime Income Tax; Progressive Taxation; Redistribution; Social Insurance;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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