Optimal Taxation in Life-Cycle Economies

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-pro le of labor productivity, and the set of taxes available to the government

On the optimality of age-dependent taxes and the progressive U.S. tax system

In life-cycle economies, where an individual's optimal consumption-work plan is almost never constant, the optimal marginal tax rates on capital and labor income vary with age. Conversely, the progressivity imbedded in the U.S. tax code implies that marginal tax rates vary with age because tax rates vary with earnings and earnings vary with age. Using numerical simulations, this paper shows that if the tax authority is prevented from conditioning tax rates on age, some degree of progressivity is desirable as progressive taxation better imitates optimal age-dependent taxes than an optimal age-independent tax system. This role for progressive taxation emanates from efficiency reasons and does not rely on any insurance nor re-distribution arguments <br><br> Keywords; progressive taxation, optimal taxation, life-cycle

Wealth Distribution and Optimal Inheritance Taxation in Life-Cycle Economies with Intergenerational Transfers

We introduce intergenerational transfers into a general equilihrium life-cycle model in order to explain observed levels of wealth heterogeneity. In our overlapping generations model, heterogenous agents face uncertain lifetime and leave both accidental and voluntary bequests to their cinldren. Furthermore, agents face stochastic employment opportunities. The model is calibrated with regard to the characteristics of the US economy. Our resuits indicate that hequests onl account for a sniall proportion of ohserved wealth heterogeneitv. The introduction of an inheritance tax increases both welfare are measured by the average value of the newborn and equality of the wealth distribution. Preliminary versions of this paper have been presented at conference on 'Intergenerational transfers, taxes and the distribution of wealth´ in Uppsala 1999 and the Econoinetric Societv European Meetirig in Santiago dc Compostela 1999. We would like to thank Michael Kaganovieli. John Laitner, James Smith, Frank Stafford, and Carl Cristian von Weizsäcker for comments on earlier versions of the paper. All remaining errors are ours

Wealth Distribution and Optimal Inheritance Taxation in Life-Cycle Economies with Intergenerational Transfers

We introduce intergenerational transfers into a general equilihrium life-cycle model in order to explain observed levels of wealth heterogeneity. In our overlapping generations model, heterogenous agents face uncertain lifetime and leave both accidental and voluntary bequests to their cinldren. Furthermore, agents face stochastic employment opportunities. The model is calibrated with regard to the characteristics of the US economy. Our resuits indicate that hequests onl account for a sniall proportion of ohserved wealth heterogeneitv. The introduction of an inheritance tax increases both welfare are measured by the average value of the newborn and equality of the wealth distribution. Preliminary versions of this paper have been presented at conference on 'Intergenerational transfers, taxes and the distribution of wealth´ in Uppsala 1999 and the Econoinetric Societv European Meetirig in Santiago dc Compostela 1999. We would like to thank Michael Kaganovieli. John Laitner, James Smith, Frank Stafford, and Carl Cristian von Weizsäcker for comments on earlier versions of the paper. All remaining errors are ours.Wealth Distribution ; Overlapping Generations ; Bequests ; Optimal Taxation

Optimal taxation in infinitely-lived agent and overlapping generations models : a review

Fiscal policy ; Taxation

Accounting for the U.S. Earnings and Wealth Inequality

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Optimal capital income taxation with housing

This paper quantitatively investigates the optimal capital income taxation in the general equilibrium overlapping generations model, which incorporates characteristics of housing and the U.S. preferential tax treatment for owner-occupied housing. Housing tax policy is found to have a substantial effect on how capital income should be taxed. Given the U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero, contrary to the high optimal capital income tax rate implied by models without housing. A lower capital income tax rate implies a narrowed tax wedge between housing and non-housing capital, which indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects the over-investment to housing.Taxation ; Housing

Optimal Fiscal Policy in Overlapping Generations Models

This paper provides, from a theoretical and quantitative point of view, an explanation of why taxes on capital returns are high (around 35%) by analyzing the optimal fiscal policy in an economy with intergenerational redistribution. For this purpose, the government is modeled explicitly and can choose (and commit to) an optimal tax policy in order to maximize society's welfare. In an infinitely lived economy with heterogeneous agents, the long run optimal capital tax is zero. If heterogeneity is due to the existence of overlapping generations, this result in general is no longer true. I provide sufficient conditions for zero capital and labor taxes, and show that a general class of preferences, commonly used on the macro and public finance literature, violate these conditions. For a version of the model, calibrated to the US economy, the main results are: first, if the government is restricted to a set of instruments, the observed fiscal policy cannot be disregarded as sub optimal and capital taxes are positive and quantitatively relevant. Second, if the government can use age specific taxes for each generation, then the age profile capital tax pattern implies subsidizing asset returns of the younger generations and taxing at higher rates the asset returns of the older ones.optimal taxation

Self-control Preferences and Taxation: A Quantitative Analysis in a Life Cycle Model

This paper examines the impact of various .fiscal policies, namely, taxes on consumption, lab and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard. We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. Given there is strong empirical and experimental evidence regarding the existence of self-control problems, our model provides quite an interesting insight: as agents.self-control costs rise, the optimal capital income tax rate will converge to Chamley and Judd value.