Optimal Taxation Over the Life Cycle

We derive the optimal income tax schedule for a life cycle labor supply model in which productivity varies exogenously and deterministically. Individuals choose 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 solve the model using an implementability constraint as in Lucas and Stokey (1983). The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. In this framework, the optimal tax schedule is progressive (the average tax rate is increasing) at low levels of income, even in the absence of redistributive concerns. Moreover, in contrast to the optimal taxation literature following Mirrlees (1971), the marginal tax rate at the top is strictly positive.