The Welfare Gains of Age‐related Optimal Income Taxation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Welfare Gains of Age Related Optimal Income Taxation Abstract Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear-as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income. Terms of use: Documents in EconStor mayJEL-Code: H21, H23, H24.

Digital Revolutions in Public Finance

“…By introducing separate tax schedules based on individual or household characteristics, governments could once more achieve distributional objectives at lower efficiency costs. Indeed, age-based taxation is shown to substantially improve the equity-efficiency trade-off in Weinzierl (2011);Bastani, Blomquist, and Micheletto (2013);and Fahri and Werning (2013). Similarly, Boskin andSheshinski (1983) andCremer Gahvari, andLozachmeur (2010) demonstrate that gender-based tax schedules can substantially improve equity, efficiency, or both.…”

Age‐dependent Taxes With Endogenous Human Capital Formation

“…Starting with Weinzierl (), many works in this literature, Farhi and Werning (), Bastani et al. (), Findeisen and Sachs (), and Stantcheva (), have shown that the bulk of the gains from using unrestricted instruments, that is, from attaining the constrained efficient allocations, is captured by the use of age‐dependent taxes. This mechanism design approach therefore offers an important reminder of how far one can get through the use of age‐dependent taxes and provides an important motivation for taking seriously these instruments.…”

Using the Discrete Model to Derive Optimal Income Tax Rates

“…6 Simulations of the discrete model have of course been presented earlier in the literature (see for instance Weinzierl 2011 andBastani et al 2013) but have usually been restricted to models with a small number of types and have not been used to characterize the overall shape of the optimal income tax schedule.…”