Optimal Taxation and Life Cycle Labor Supply Profile

Michael Kuklik and Nikita Cespedes Reynaga
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Michael Kuklik: Long Island University

No 8, Working Papers from Peruvian Economic Association

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.

Keywords: Labor supply; optimal taxation; capital taxation; non-linear wage; inter-vivos transfer (search for similar items in EconPapers)
JEL-codes: E13 H21 H24 H25 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac, nep-pbe and nep-pub
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Related works:
Working Paper: Optimal Taxation and Life Cycle Labor Supply Profile (2013)
Working Paper: Optimal Taxation and Life Cycle Labor Supply Profile (2013)
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