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Age-Targeted Income Taxation, Labor Supply, and Retirement

Johan Gustafsson ()
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Johan Gustafsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan

No 985, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper studies the life-cycle effects of favorable marginal tax treatment of older workers on their optimal life-cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption/savings, labor supply/leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect is however an increase in life-cycle labor supply and consumption.

Keywords: Retirement age; life cycle; tax heterogeneity; savings; consumption; leisure (search for similar items in EconPapers)
JEL-codes: D15 J22 J26 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2021-02-04, Revised 2021-03-01
New Economics Papers: this item is included in nep-age, nep-dge, nep-lma, nep-pbe and nep-pub
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