Optimal Progressivity with Age-Dependent Taxation

Jonathan Heathcote, Kjetil Storesletten and Giovanni Violante

No 13550, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.

Keywords: Tax progressivity; Life cycle; Income distribution; Skill investment; Labor supply; Incomplete markets (search for similar items in EconPapers)
JEL-codes: D30 E20 H20 H40 J22 J24 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-age and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal progressivity with age-dependent taxation (2020)
Working Paper: Optimal Progressivity with Age-Dependent Taxation (2019)
Working Paper: Optimal Progressivity with Age-Dependent Taxation (2018)
Working Paper: Optimal Progressivity with Age-Dependent Taxation (2017)
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