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

Johannes Brumm, Laurence Kotlikoff and Christopher Krause

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), a stochastic pattern-search algorithm. The GLO robustly, precisely, and quickly 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 assuming standard preferences. The system incorporates kinks from federal personal 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 can be equally dramatic. Associated excess burdens range from substantial to massive. Restricting labor supply to full- or part-time work can eliminate flipping when it’s optimal and produce flipping when it’s sub-optimal. Joint filing can significantly reduce the earnings of lower-wage spouses relative to that of higher-wage spouses. The GLO can be applied to assess a country’s or state’s full set of work and saving disincentives. Consequently, it can facilitate analyses of structural labor supply and tax reform.

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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