Optimal Taxation in Life-Cycle Economies

Andres Erosa and Martin Gervais

No 9812, University of Western Ontario, Departmental Research Report Series from University of Western Ontario, Department of Economics

Abstract: This paper studies optimal taxation in an overlapping generations economy. We characterize the optimal path of fiscal policy, both in the long run and in the transition to the steady state. The implications of this study are in sharp contrast with the prescription offered by infinitely-lived agent models. First, the government's desire to tax initial holdings of capital at confiscatory rates is endogenously curtailed by intergenerational redistributional considerations. Second, because of life-cycle elements, capital income taxes are in general different from zero even in the steady state. The tax rate on capital income should only be zero if it is optimal to tax consumption goods uniformly over the lifetime of individuals. The conditions for uniform taxation of consumption depend, in turn, on preferences, the age-profile of labor productivity, and the set of taxes available to the government.

JEL-codes: E62 H21 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (24)

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Journal Article: Optimal Taxation in Life-Cycle Economies (2002)
Working Paper: Optimal taxation in life-cycle economies (2000)
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