On the optimal lifetime redistribution and social objectives: a multidimensional approach

Terhi Ravaska (), Sanna Tenhunen () and Matti Tuomala
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Terhi Ravaska: University of Tampere
Sanna Tenhunen: Finnish Centre for Pensions

International Tax and Public Finance, 2018, vol. 25, issue 3, No 3, 653 pages

Abstract: Abstract We characterize optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life cycle and this preference together with productivity is non-observable to government. We consider different social objectives and incorporate a novel approach taken in the spirit of Roemer (Equality of opportunity, Harvard University Press, Harvard, 1998) and Van de Gaer (Equality of opportunity and investments in human capital, Katholieke Universiteit Leuven, 1993). This approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also numerically examine the properties of an optimal lifetime redistribution policy. We find support for a nonlinear tax/pension program in which impatient types are taxed at the margin, and patient low ability types are subsidized in their retirement consumption. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between different social objectives, indicating that the optimal income taxation results are sensitive to the choice of the social planner’s goals.

Keywords: Optimal taxation; Lifetime redistribution; Heterogeneous time preferences (search for similar items in EconPapers)
JEL-codes: D71 H21 H55 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10797-017-9473-0

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