Taxes on Lifetime Income: A Good Idea?

Dirk Krueger () and Chunzan Wu ()
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Dirk Krueger: University of Pennsylvania, CEPR and NBER
Chunzan Wu: Peking University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Household consumption and welfare are more strongly associated with lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for a government seeking to provide social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with endogenous labor supply and idiosyncratic wage risks, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax.

Keywords: Lifetime Income Tax; Progressive Taxation; Redistribution; Social Insurance. (search for similar items in EconPapers)
JEL-codes: E60 H20 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2025-04-02
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