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Optimal Mirrleesean Taxation in a Ben-Porath Economy

Marek Kapicka

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 2, 219-48

Abstract: I characterize optimal taxes in a life-cycle economy where ability and human capital are unobservable. I show that unobservable human capital effectively makes preferences over labor nonseparable across age. I generalize the static optimal tax formulas to account for such nonseparabilities and show how they depend both on own-Frisch labor elasticities and cross-Frisch labor elasticities. I calibrate the economy to US data. I find that the optimal marginal income taxes decrease with age, in contrast to both the US tax code and to a model with observable human capital. I demonstrate that the behavior of cross Frisch elasticities is essential in explaining the decline. (JEL D91, H21, H24, J24)

JEL-codes: D91 H21 H24 J24 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20110110
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Working Paper: The Dynamics of Optimal Taxation when Human Capital is Endogenous (2006) Downloads
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