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Optimal Taxation and Life Cycle Labor Supply Profile

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  • Céspedes, Nikita

    (Banco Central de Reserva del Perú
    PUCP)

  • Kuklik, Michael

    (Long Island University)

Abstract

The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.

Suggested Citation

  • Céspedes, Nikita & Kuklik, Michael, 2013. "Optimal Taxation and Life Cycle Labor Supply Profile," Working Papers 2013-020, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2013-020
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    References listed on IDEAS

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    1. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 338-369, August.
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    3. Daniel Aaronson & Eric French, 2004. "The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 329-352, April.
    4. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    5. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    6. William G. Gale & John Karl Scholz, 1994. "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 145-160, Fall.
    7. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    8. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, "undated". "The Effects of Income and Wealth on Time and MOney Transfers Between Parents and Children," IPR working papers 96-5, Institute for Policy Resarch at Northwestern University.
    9. Adolfo Figueroa, 1995. "Desigualdad y Democracia," Capítulos de Libros PUCP / Chapters of PUCP books,in: Gonzalo Portocarrero & Marcel Valcárcel (ed.), El Perú frente al siglo XXI, edition 1, chapter 3, pages 48-71 Fondo Editorial - Pontificia Universidad Católica del Perú.
    10. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    11. Nikita Céspedes Reynaga & Silvio Rendon, 2012. "The Frisch Elasticity in Labor Markets with high Job Turnover," Department of Economics Working Papers 12-13, Stony Brook University, Department of Economics.
    12. 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 317-339, June.
    13. Victoria Osuna & Jose-Victor Rios-Rull, 2003. "Implementing the 35 Hour Workweek by Means of Overtime Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 179-206, January.
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    15. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    16. Waldo Mendoza Bellido, 2013. "Contexto internacional y desempeño macroeconómico en América Latina y el Perú: 1980-2012," Documentos de Trabajo / Working Papers 2013-351, Departamento de Economía - Pontificia Universidad Católica del Perú.
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    Cited by:

    1. William Peterman, 2016. "The effect of endogenous human capital accumulation on optimal taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 46-71, July.
    2. Mario D. Tello, 2013. "Science, Technology and Innovation in Peru 2000-2012: The Case of Services," Documentos de Trabajo / Working Papers 2013-353, Departamento de Economía - Pontificia Universidad Católica del Perú.

    More about this item

    Keywords

    Labor supply; optimal taxation; capital taxation; non-linear wage; inter-vivos transfer;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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