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Optimal Taxation over the Life Cycle

  • Gorry, Aspen
  • Oberfield, Ezra

We derive the optimal labor income tax schedule for a life cycle model with deterministic productivity variation and complete asset markets. An individual chooses whether and how much to work at each date. The government must finance a given expenditure and does not have access to lump sum taxation. We develop a solution method that combines incentive constraints into a single implementability constraint. The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. The optimal tax schedule has an increasing average tax rate at low levels of income to encourage labor market participation, even in the absence of redistributive concerns. In contrast to the Mirrleesian optimal taxation literature, the marginal tax rate at the top is strictly positive.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25297.

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Date of creation: 26 May 2010
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Handle: RePEc:pra:mprapa:25297
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  1. Juan Carlos Conesa & Dirk Krueger, 2015. "On the Optimal Progressivity of the Income Tax Code," Working Papers 131, Barcelona Graduate School of Economics.
  2. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  3. Nezih Guner, 2011. "Taxing Women: A Macroeconomic Analysis," 2011 Meeting Papers 581, Society for Economic Dynamics.
  4. John Bailey Jones & Eric French, 2010. "The Effects of Health Insurance and Self-Insurance on Retirement Behavior," Discussion Papers 10-10, University at Albany, SUNY, Department of Economics.
  5. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2011. "Gender-Based Taxation and the Division of Family Chores," American Economic Journal: Economic Policy, American Economic Association, vol. 3(2), pages 1-40, May.
  6. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  9. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "The Optimal Income Taxation of Couples," Econometrica, Econometric Society, vol. 77(2), pages 537-560, 03.
  10. Matthew Weinzierl, 2011. "The Surprising Power of Age-Dependent Taxes," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1490-1518.
  11. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  12. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
  13. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
  14. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  15. Narayana Kocherlakota & Borys Grochulski, 2008. "Nonseparable Preferences and Optimal Social Security Systems," 2008 Meeting Papers 16, Society for Economic Dynamics.
  16. Casey B. Mulligan, 2001. "Aggregate Implications of Indivisible Labor," NBER Working Papers 8159, National Bureau of Economic Research, Inc.
  17. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
  18. Gervais, Martin, 2009. "On the optimality of age-dependent taxes and the progressive U.S. tax system," Discussion Paper Series In Economics And Econometrics 0905, Economics Division, School of Social Sciences, University of Southampton.
  19. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  20. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2011. "Income Taxation of U.S. Households: Basic Facts," IZA Discussion Papers 5549, Institute for the Study of Labor (IZA).
  21. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
  22. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  23. Mikhail Golosov & Aleh Tsyvinski & Ivan Werning, 2007. "New Dynamic Public Finance: A User's Guide," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 317-388 National Bureau of Economic Research, Inc.
  24. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  25. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  26. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  27. 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.
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