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The effects of population aging on optimal redistributive taxes in an overlapping generations model

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  • Brett, Craig

Abstract

The impact of population aging on the steady state solution to a Ordover-Phelps (1979) overlapping generations optimal nonlinear income tax problem with two types of workers and quasilinear-in-leisure preferences is investigated. A decrease in the rate of population growth, which leads to an aging population, increases the relative price of consumption per person in retirement, which tends to decrease optimal consumption for retirees of both skill types. It is also shown that the optimal steady state rate of interest equals the rate of population growth. As a result, the steady state interest rate unambiguously declines when the rate of population growth declines. The resulting adjustments in production plans has an ambiguous effect on the aggregate wage rate. This article identifies factors contributing to an increase in the aggregate wage when the population ages, namely normality of consumption in retirement, complementarity between capital and labor in production, and a large capital deepening effect relative to the increase in dependency owing to demographic change. Depending on the sign of this wage effect, ambiguities may arise in the direction of change in the optimal steady state consumption and production plans. It is also shown that the optimal marginal income tax rates are independent of the rate of population growth.

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  • Brett, Craig, 2008. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," MPRA Paper 8585, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:8585
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    1. repec:hal:spmain:info:hdl:2441/45smbs6p8180bqfu6epmve62q2 is not listed on IDEAS
    2. Philippe Choné & Guy Laroque, 2014. "Income tax and retirement schemes," Sciences Po publications 2014-06, Sciences Po.
    3. Chen, Yunmin & Guo, Jang-Ting & Krause, Alan, 2020. "The credibility of commitment and optimal nonlinear savings taxation," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. Philippe Choné & Guy Laroque, 2018. "On the redistributive power of pensions," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 50(3), pages 519-546, March.
    5. Craig Brett & John A. Weymark, 2009. "Comparative Statics of Optimal Nonlinear Income Taxation in the Presence of a Publicly Provided Input," Vanderbilt University Department of Economics Working Papers 0910, Vanderbilt University Department of Economics.
    6. repec:hal:wpspec:info:hdl:2441/45smbs6p8180bqfu6epmve62q2 is not listed on IDEAS

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    More about this item

    Keywords

    optimal income taxation; overlapping generations model; population aging;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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