On the optimal lifetime redistribution and equality of opportunities

Terhi Ravaska, Sanna Tenhunen and Matti Tuomala

No 1600, Working Papers from Tampere University, Faculty of Management and Business, Economics

Abstract: In this paper we examine optimal lifetime redistribution policy in equality of opportunity framework (EoO). The dynamic complications are avoided by studying the optimal redistribution within a cohort. We characterise optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life-cycle and this preference together with productivity is non-observable to government. In the spirit of Roemer (1998) and Van de Gaer (1993) our approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also examine numerically the properties of an optimal lifetime redistribution policy. The numerical results show the implications of different structure of economy to optimal taxation policy. We find support for non-linear tax/pension program in which some types of individuals are taxed while some are subsidized. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between utilitarian and EoO-cases, indicating that the optimal income taxation results are sensitive for the choice of social planner’s goals. There are larger differences between types in working careers under equality of opportunity framework than in standard utilitarian case

Keywords: Optimal taxation; lifetime redistribution; heterogeneous time preferences; equality of opportunity (search for similar items in EconPapers)
JEL-codes: D71 H21 H55 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-02
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http://urn.fi/URN:ISBN:978-952-03-0071-5 First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tam:wpaper:1600

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