Optimal Taxation with Current and Future Cohorts

Hans Fehr () and Fabian Kindermann

No 3973, CESifo Working Paper Series from CESifo

Abstract: This note demonstrates that optimal tax calculations in overlapping generations models should not be based exclusively on long-run welfare changes. As the latter represent a mix of efficiency and intergenerational redistribution effects, they typically favor policies which redistribute towards future cohorts. Taking the recent study of Conesa et al. (2009) as an example, we explicitly consider short- and long-run welfare effects and isolate the aggregate efficiency consequences of a tax reform. Based on this aggregate efficiency measure, we find a much lower capital income tax rate and a significantly less progressive labor income tax schedule than Conesa et al. (2009) to be optimal. As we demonstrate, the optimality of capital income taxation is explained by the low interest elasticity of precautionary savings compared to that of life-cycle savings.

Keywords: stochastic OLG model; precautionary savings; intragenerational risk sharing and redistribution (search for similar items in EconPapers)
JEL-codes: C68 D91 H21 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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