The Global Life-Cycle Optimizer – Analyzing Fiscal Policy's Potential to Dramatically Distort Labor Supply and Saving

Johannes Brumm, Laurence Kotlikoff, Christopher Krause and Joshua Zanger

No 32335, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Fiscal policy in the U.S. and other countries renders intertemporal budgets non-differentiable, non-convex, and discontinuous. Consequently, assessing work and saving responses to policy requires global optimization. This paper develops the Global Life-Cycle Optimizer (GLO), which robustly and precisely locates global optima in highly complex fiscal settings. We use the GLO to study how a stylized U.S. fiscal system distorts workers’ labor supply and saving. The system incorporates kinks from federal income tax brackets, Social Security’s FICA tax, and a notch from the provision of basic income below a threshold. The GLO reproduces theoretically predicted earnings bunching and flipping over a remarkably wide range of wage rates. Saving distortions and associated excess burdens are substantial. Extensions with discrete labor supply, joint taxation of couples, social security, and labor-income risk demonstrate the versatility of the GLO. The GLO outperforms value function iteration and readily solves cases where value function iteration is infeasible.

JEL-codes: H2 H3 H30 H31 I38 J22 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-dge and nep-pbe
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