Discussion paper

DP13550 Optimal Progressivity with Age-Dependent Taxation

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.


Heathcote, J, K Storesletten and G Violante (2019), ‘DP13550 Optimal Progressivity with Age-Dependent Taxation‘, CEPR Discussion Paper No. 13550. CEPR Press, Paris & London. https://cepr.org/publications/dp13550