The Welfare Gains of Age Related Optimal Income Taxation

53 Pages Posted: 29 Oct 2010

See all articles by Spencer Bastani

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation; Linnaeus University - Department of Economics and Statistics; Research Institute of Industrial Economics (IFN)

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luca Micheletto

University of Milan

Multiple version iconThere are 3 versions of this paper

Date Written: October 27, 2010

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.

Keywords: labor income taxation, capital income taxation, age-dependent taxes, OLG model

JEL Classification: H21, H23, H24

Suggested Citation

Bastani, Spencer and Blomquist, Soren and Micheletto, Luca, The Welfare Gains of Age Related Optimal Income Taxation (October 27, 2010). CESifo Working Paper Series No. 3225, Available at SSRN: https://ssrn.com/abstract=1698630

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

Linnaeus University - Department of Economics and Statistics ( email )

Växjö, 351 06
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Soren Blomquist

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Luca Micheletto (Contact Author)

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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