DP13550 Optimal Progressivity with Age-Dependent Taxation
|Author(s):||Jonathan Heathcote, Kjetil Storesletten, Giovanni L. Violante|
|Publication Date:||February 2019|
|Keyword(s):||income distribution, incomplete markets, Labor Supply, Life Cycle, Skill investment, Tax progressivity|
|JEL(s):||D30, E20, H20, H40, J22, J24|
|Programme Areas:||Public Economics, Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13550|
This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.